BlackRock (BLK) reported a big slump in fourth quarter earnings. Its certainly been a sour note for BLK. The stock is down around 30% over the last year. That said, I don't see a lot of downside left at present. BlackRock's earnings slump shouldn't come as a big surprise considering the huge market correction that occurred in the fourth quarter. The asset manager is a massive player in investment, and was obviously very exposed to the effects. The stock has suffered enough this year, and I don't see much in the fourth that would justify further downside.
If BlackRock were still trading at over $500 a share, I'd consider the fourth quarter results a nightmare. However, the steep declines over the past seven months make me much less critical of BlackRock's earnings. It was foreseeable given market conditions. The stock was up about 4% today (at the time of writing), implying I'm not the only one thinking along these lines. Total revenues took an 8.7% hit in the fourth quarter. Earnings were the real drag here, with an almost 60% drop year over year to $927 million vs. $2.29 billion a year ago. Interestingly enough, the earnings hit wasn't nearly as related to operating income as it was to the contrast between a tax benefit. Income before taxes fell 20% to $1.17 billion. The big thing that resulted in such a large rate drop in net income is that BlackRock enjoyed the effects of an $815 million tax benefit last year. This year they incurred $247 million in tax expenses.
Adjust earnings were $6.08 a share vs. $6.19 last year. I prefer to look at GAAP earnings, as they tell you what actually happened within the quarter. Diluted earnings of $5.78 represented a 58% fallout year over year. Despite the decidedly unwelcome quarter, Blackrock delivered growth in 2018. Total revenues increased by 4%. They're doing exceptionally well at bringing in capital through their use of Exchange Traded Funds. iShares were listed at the top of their list of contributors to the company's net inflows of $124 billion. Full year earnings were iffy. $26.58 were a $3.54 decline year over year, although the stock has more than adjusted for the change over the past six months. Currently the stock is trading at roughly 16x full year earnings.
CEO Larry Fink was quick to point out that the company's assets declined due to market declines, rather than any internal pains. I'm inclined to agree. Total net inflows actually increased $6.1 billion in the fourth quarter. I view BlackRock as a solid asset manager regardless of the recent issues. Admittedly, asset managers are probably going to have a tougher time this year than they have over the past decade. In fact, I'd almost guarantee that a large majority of smaller hedge funds have a very hard time over the next year. BlackRock's scale and dominance as the largest asset manager in the world should keep it safe from capital withdrawals. Earnings and performance may suffer from more volatility, but the appeal of the firm is still there for anyone looking for investment management.
Trading at around $415, the stock is pretty fairly valued relative to its full year results of $26.58. Estimates for 2019 are averaging around $26.41. If BlackRock can meet that figure, we shouldn't see much more downside in the stock price. It feels like an opportunity for a 3% dividend in a time proven stock.
