by Todd Shaver | Aug 22, 2017 | 7am News Flash, Stocks for Success
August 22, 2017
Stock at $415; symbol BLK
Company Description:
BlackRock provides diversified investment management services to institutional clients and to retail investors through various investment vehicles. The company manages funds and also provides risk management services to fixed income institutional investors.
Company Background:
BlackRock is led by CEO Laurence Fink, who has overseen a string of major acquisitions in recent years, expanding into private equity, real estate, energy, and hedge funds as investors look to diversify beyond stock and bond funds.
Fink engineered a blockbuster merger with Barclays Global Investors in 2009. In the deal, which was several years in the making, BlackRock bought Barclays Global Investors from UK banking giant Barclays for $15 billion. Barclays Bank retained a 20% stake in the combined firm, but Fink remained in charge of the enterprise. The merger nearly tripled BlackRock's assets under management and propelled the company to the top of the international money management industry by enhancing its investment and risk management capabilities. The deal also gave BlackRock a much larger footprint outside the US and added more than 3,500 new employees.
Overview:
With some $5.7 trillion in assets under management, BlackRock is the world's largest public investment management firm. It specializes in equity and fixed income products, as well as alternative and multi-class instruments, which it invests in on behalf of institutional and retail investors worldwide. It does not engage in proprietary trading. Clients include pension plans, governments, insurance companies, mutual funds, endowments, foundations, and charities. BlackRock also provides risk management services through BlackRock Solutions and is a leading provider of exchange-traded funds (ETFs) through iShares. The firm has offices in more than 30 countries and has investments in some 90% of the Fortune 100.
Operations:
BlackRock manages some $5.7 trillion in assets through 135 investment teams. The BlackRock Solutions division provides risk management, advisory, and enterprise investment system services. iShares, one of BlackRock's brands, is a leading provider of exchange-traded funds (ETFs). BlackRock's risk management technology platform, Aladdin, is used by over 25,000 investment professionals around the world.
The company offers active and passive retail investment services. Mutual funds account for the majority of retail investors’ assets, specifically about 80%. Retail has a US and an international arm.
BlackRock's iShares is the world's largest ETF in the world, with $1.3 trillion in assets under management. iShares also operates in the US and internationally.
The company possesses $2.9 trillion in institutional assets, of which $1.9 trillion are index funds and $1.0 trillion which are actively managed like Large Cap Growth, Mid Cap Value, etc. In other words, not ETFs. Their clients consist of pensions, foundations, and endowments, official institutions, and financial and other institutions.
Geographic Reach:
New York-based BlackRock has more than 70 offices in more than 30 countries. The company makes 66% of its revenue in the Americas. Europe accounts for nearly 30%, and the Asia-Pacific region 5%. BlackRock has clients and investments in more than 100 countries.
Sales and Marketing:
BlackRock serves 21 out of the 25 largest endowments and foundation organizations in the US. It also serves around 90 of the Fortune 100 companies, and more than 90% of the largest US retirement plans.
The firm focuses on establishing and maintaining its investment management relationships by marketing its services through financial professionals, pension consultants, third-party distribution relationships, or directly to investors themselves.
Clients include tax-exempt institutions such as defined benefit pension plans, charities and foundations; official institutions (central banks, sovereign wealth funds, supranationals and other government entities); and taxable institutions (insurance companies, financial institutions, corporations and third-party fund sponsors, as well as and retail investors).
Financial Performance:
Thanks to a rising stock market and a growing investor base, BlackRock has quadrupled its assets under management since 2007 -- from $1.3 trillion to $5.1 trillion at the end of 2016 -- which has led strong fee and advisory income growth over the past few years.
Revenue declined slightly in fiscal 2016, falling 2% to $11.2 billion due to lower investment advisory performance fees from equity and alternative products. Weakness was offset to an extent by stronger Aladdin revenue.
Net income fell 3% to $3.2 billion on the back of lower revenue. Cash flow from operations fell 28% to $2.2 billion due to a non-operating item not a part of the regular day-to-day business. But revenues and earnings were strong in the first part of 2017.
Strategy:
Even powerful fund managers' jobs are not immune to the threat of automation. In 2017, BlackRock sacked seven portfolio managers as part of a wider shift away from active stock pickers and towards a robot-led quantitative approach. Amid relative market stability, active fund managers are less able to beat the market than passive trackers. Investors pulled some $40 billion from actively managed funds on Wall Street during 2016. The robo-funds can be offered at a lower price than the more expensive, hand-picked investment funds.
Part of the shift to automation includes the transfer of $1 trillion in assets under custody of State Street to JP Morgan in 2017 which will cut operating expenses. JP Morgan has been investing in automation technology, enabling a less expensive provision of services.
Mergers and Acquisitions:
In 2017, BlackRock acquired First Reserve Energy Infrastructure Funds with $10 billion under management. The acquisition will help connect BlackRock's clients with energy infrastructure projects.
In 2016, BlackRock Real Assets added to its wind generations holdings with the purchase of GE Energy Financial Services' 50% interest in the Grandview wind project in Texas. BlackRock's renewable energy assets have 2 GW of generating power.
BlackRock expanded its presence in Mexico with the 2015 purchase of Infraestructura Institucional, the country's leading independently managed, infrastructure investment firm. The acquisition opens up infrastructure investments in Mexico to BlackRock's clients.
In 2015, BlackRock agreed to buy Bank of America's $87 billion-money market fund business, boosting its global cash-management business by 30% to $370 billion in assets under management. The deal comes as Bank of America and other large banks have faced regulatory pressure to simplify their businesses in the years following the global financial crisis. BlackRock was happy to oblige. BlackRock is the world's largest asset manager with $5.7 trillion in assets ..
Financial Outlook:
BMR Take: BlackRock is a compelling value trading at 17x next year’s consensus EPS estimate of $25. But don’t take it from just us. One of the world’s best hedge funds, Third Point, just bought the stock and believes BlackRock is a "misunderstood franchise" with a massive 38% market share of exchange-traded funds. Third Point’s CEO said he thinks this acceleration in ETFs is just getting started and BlackRock is valued like a traditional asset manager, but it has much greater potential for structural revenue growth and operating margin expansion.
by Todd Shaver | Aug 2, 2017 | 7am News Flash
Shopify (SHOP: $104, up $12 – 13%)
August 2, 2017
Canadian e-commerce platform Shopify soared after beating analysts’ revenue estimates for a ninth quarter in a row, boosting the forecast for the current quarter and signing up a record number of new merchants. The second-quarter earnings report yesterday reaffirmed the company’s reputation as a stock market darling. The shares pushed Shopify’s market cap to more than $10 billion.
The company booked $152 million in sales, beating the average analyst estimate of $144 million and its own forecast of $143 million, which marked 75% growth from the prior year quarter. Adjusted operating loss -- which excludes stock-based compensation expense -- was $3 million, or 1.9% of revenue, versus $3.2 million, or 3.7% of revenue, in the prior year period.
Some analysts, from firms including Royal Bank of Canada and Goldman Sachs, have lowered their ratings on the stock recently, after such gains have made it one of the most expensive software stocks. However, while Shopify doesn’t yet turn a profit, this quarter’s loss of one penny was about as close to breakeven as it gets.
Shopify hit 500,000 customers during the quarter, with clients ranging from individuals selling handmade goods to web stores for major brands like Budweiser and Tesla. This was up from 300,000 a year ago. Wow. Chief Executive Officer Tobi Lutke said “500,000 merchants is just such a crazy number. I have lots of stories about being laughed out of VC offices because they told me the entire addressable market for my company was 40,000 stores.”
Shopify’s growth comes as more retail spending shifts online from physical stores, prompting a new wave of brick-and-mortar bankruptcies. The company is adding and growing new revenue streams, such as giving loans to its customers to help them grow and poaching bigger, more established customers from competitors.
The number of merchants shows growth of 67% from the same period last year. Average annual growth since 2012 has been 70%. Keeping up such a rapid pace will become harder though, CEO Lutke has said repeatedly.
BMR Take: When we look at the core building blocks of how this company is advancing we’re of the view that its growth potential of Total Addressable Market (TAM) is expanding. In addition, we see opportunities in international, in new merchant solutions and apps, and building scale with Shopify Plus, the company’s enterprise-focused solution. In our view, the valuation is supported by the long runway and expanding TAM given Shopify’s lower relative market share, still less than 5%. We reiterate our bullishness on the stock. The stock is currently trading at about 9 times the estimate of next year’s sales. This valuation is rich but could still move higher.
We added the stock four months ago at $73 so we are up 43% in that short time frame. The $90 Target was obliterated today – we purposely did not raise it over the weekend. We wanted to see how revenues looked. Needless to say we are quite pleased. We hereby raise our Target to $115 and our Sell Price from $65 to $93.
by Todd Shaver | Jul 11, 2017 | 7am News Flash
Square (SQ: $25.44) was up 6% yesterday and set a new all-time high of $25.56 and it was up another 10 cents in after-hours trading. We love it when Wall Street comes to us! The market cap is now half a billion dollars away from $10 billion. This was an $18 stock six months ago. We believe online payment processing companies is the place to be. We like PayPal and Visa of course, and all three firms are in a different niche of this great business. And they are all growing like wildfire. After all, do you write as many checks as you used to? We haven’t written one in over a month.
As we said in a tweet yesterday, the buyout boys better come a-calling soon, because the price just keeps going higher.
Tesla (TSLA: $327) was up 3.5% yesterday, making a nice little comeback from the big selloff the past few weeks. As you remember, the stock hit $387 on June 26th, and then plummeted to $308 on July 3rd, due to talk of poor sales in the last quarter. Tesla is not concerned about last quarter. They are concerned about 4Q17 and 1Q18 as they ramp up production of the new Model 3, starting at $35,000.
And we are concerned too. But we are believers and think Musk can pull it off. If things get delayed a little, that’s OK by us. Because this is the great automobile story in recent history. If you can’t stand the heat, then sell your stock and buy GM. It’s paying over 4% - good. And trading at the same price as it was in 2010, seven years ago – not good. We’re sticking with Tesla.
by Todd Shaver | May 10, 2017 | 7am News Flash
Sabra Health Care REIT (SBRA: $24), a Maryland Corporation, is a self-administered, self-managed real estate investment trust that owns and invests in real estate serving the Healthcare industry. Sabra leases properties to tenants and operators throughout the United States. Sabra's portfolio consists of skilled nursing facilities, senior housing facilities, a hospital, and one mezzanine loan nationwide. Its property portfolio consists of over 180 real estate properties held for investment, consisting of 100 skilled nursing/transitional care facilities, 85 senior housing facilities, and one acute care hospital. Capital Care Properties (CCP: $27) has over 340 primarily skilled nursing and senior housing facilities. The combined company will have over 500 properties.
Care Capital shareholders will receive a fixed exchange ratio of 1.12 shares of Sabra for each Care Capital share. At closing, estimated for 3Q17, Sabra shareholders will own approximately 40% of the combined entity and Care Capital shareholders 60%. The new company would create a more diversified real-estate investment trust with better access to debt markets. The combined company is expected to have a market capitalization of about $7.4 billion. Sabra management will lead the combined entity with three Care Capital directors taking board seats. We hope that management will aggressively use asset sales to create a portfolio with a higher percentage of sustainable rents. If they do, we see compelling upside to the stock.
Also, the combined entity's reduced cost of capital and back office savings will also provide management better flexibility to deal with tough issues within the Care Capital portfolio, specifically an increasingly difficult skilled nursing operating environment. Progress here could unlock real excitement for investors to own the stock.
Lastly, the combined company expects to have modest leverage, excellent liquidity and strong fixed charge coverage, with investment grade credit metrics. Sabra and Care Capital believe the greater scale will promote investor interest and increased shareholder liquidity, positioning the combined company to benefit from a more attractive cost of capital, allowing it to successfully compete for future investment opportunities. More acquisitions provide a path towards improved earnings power, a trait we love to see in our Bull Market Report portfolio companies.
BMR Take: We cheer the benefits and rationale for this transaction. We eagerly await the 3Q17 closing timeline as we see upside to the stock as the acquisition closes and the synergies begin to be realized. We hereby remove Capital Care from our REIT portfolio at $27, flat with the price when the stock was added, but collecting the big 8.5% dividend since September is a nice return. We add Sabra to the REIT portfolio at $24 and expect it to get back to $29 where it was in late April. We’ll set a Target of $30 on the stock and a Sell Price of $21.
by Todd Shaver | May 9, 2017 | 7am News Flash
This key event occurred at the very end of the first quarter. It is exciting to see the announced merger plans on track. We think the business combination makes a ton of sense and is one of the many reasons we like the stock.
As a reminder, the synergies of putting the two companies together are big. At first glance, we think the originally announced target synergies for the merger – including savings of $350-$425 million - look overly conservative. One reason is that many analysts say that there is opportunity to reach further into Tesoro’s legacy operations to optimize the retail business, the supply of crude at the St Paul Park facility, and the overall footprint in the Bakken. This is all said to just be the low hanging fruit. Opportunities to optimize logistics in the Permian region could be another leg of upside to cost savings over time.
All in all, the deal is widely liked by industry followers. Tesoro (TSO: $81) is buying quality, strong cash margin refining assets, which come with embedded logistics and retail growth opportunities. This fits within the existing strategy for Tesoro further building into The Western Leader in the refining business.
With the culmination of this deal, Tesoro has now built out a leading footprint in the Western US and proven a strong track record of reaching big milestones. For those following the company for a long time, they are pleased to now see that the company has successfully diversified from its historical core assets while keeping debt at the parent under control. Looking ahead, Tesoro can now optimize across a much larger footprint to deliver revenue opportunities and reduce costs. We are eager to see what Tesoro can deliver from the now broad platform.
BMR Take: We continue to see compelling value in Tesoro shares. The stock trades at a massive discount to post merger net asset value estimates of $120-140. In comparison, Berkshire Hathaway owns a 15% stake in Tesoro’s competitor Philllips66, which the market values at a premium to net asset value. With several big name institutional investors recently taking large positions in Tesoro, we can’t help but be excited about the prospects for this investment.
by Todd Shaver | Apr 27, 2017 | 7am News Flash
PayPal (PYPL: $47, up $2.50 in after hours trading to a new all-time high) reported earnings for 1Q17 of 44 cents a share on revenue of $2.98 billion. A year ago, we saw 37 cents a share on sales of $2.54 billion. Both top and bottom lines were stellar. Wall Street was looking for the company to report earnings of 41 cents on sales of $2.94 billion.
The company had 202 million active customer accounts at the end of the quarter, up from 196 million in the previous quarter.
And, listen to this: The board of directors has authorized a new $5 billion stock repurchase program. Its current buyback program has $500 million remaining in the current quarter.
We are within a whisker of our Target Price of $48. We hereby raise the Sell Price from “We would not sell PayPal” to “We would not sell PayPal!”
