BlackRock (BLK) is a broad-based investment manager. It manages equities, fixed income, and balanced funds, along with “alternative” investments like hedge funds, pools of hedge funds (known as “funds of funds”), and funds that invest in currencies, commodities, and real estate. 

About 58% of its $5.8 trillion in long-term assets under management (AUM) consists of equities. BlackRock is the world leader in ETFs through its iShares brand. The downside is that index funds don’t pay as well as actively managed funds.

The firm’s scale gives it impressive cash flow even at low fee rates. Free cash flow is approximately 30% of its revenue. BlackRock uses its free cash flow to pay dividends (a 2.3% yield), acquire other investment management firms, and buy back stock.

We believe that BlackRock can maintain double-digit EPS growth with 3%-5% net cash inflows, and 5%-7% market growth between stocks and bonds. Profit margins have gradually expanded, and this should continue. should also experience an EPS boost from share buybacks if it doesn’t find something even more profitable to do with its free cash flow, such as acquisitions.

Retail investors sold off stock funds in the second quarter and reduced how much they put into BlackRock bond funds. This is a part of an industry-wide pattern that emerged in the second quarter. We expect it to be temporary because mutual funds and ETFs are the overwhelmingly popular way for individuals to invest. Related weakness in BlackRock’s share price could represent a good entry point for investors.

We believe the company can grow EPS by 12% annually. Five years of 12% growth could result in EPS approaching $45. A repeat of the average high P/E ratio of 20.5 may lead to a stock price as high as $920.

Adding in dividends, the total return could be 15% per year. The downside risk appears to be 27% to 369, the product of the average low P/E of 14.5 and EPS of $25.46 over the past twelve months.