The Wall Street Journal seizes on BlackRock's [profile] just-released Q2 earnings as an excuse to delve into the asset manager's relative valuation. Oh yes, its earnings were down.

Meanwhile, WSJ reporter Spencer Jakab writes that BlackRock's "scope and size have given it the most stable operating margin" of any asset manager before quickly adding that: "Size isn't all it is cracked up to be."

Jacab's thesis is that while asset management is a "uniquely" scalable business, BlackRock trades at a discount to its smaller peers:

Analysts at Goldman Sachs note that high-fee, alternative asset managers such as Blackstone trade at an enterprise value equal to about 8.8% of assets under management. Small and medium-size traditional managers trade at 2.2%, while large ones average just 1.6%. BlackRock seems cheap even within that group at just 0.9%.

He posits that the discounted price for BlackRock shares reflects "worries that recent good times for BlackRock can't last."

What he fails to explore is that much of BlackRock's business derives from notoriously low-margin ETFs it picked up from Barclays. Its other core business as an institutional fixed income manager is also relatively low margin. Two active equity business it purchased from SSRM and Merrill Lynch hold promise of higher margins, but value equity has faced headwinds over the past decade. Noting all of the above, the low multiple should not be a surprise.

Oh yes, those earnings? For the second quarter, BlackRock earned $3.02 per share, which is down from $3.21 in Q2 2011.  

Edited by: Sean Hanna, Editor in Chief


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