BlackRock Inc. (BLK) far exceeded analysts’ expectations on Wednesday with third-quarter earnings rising 74% on profits of $551 million versus $317 million a year ago. Earnings per diluted share of $2.75 significantly beat the consensus estimate of $2.39, and also surpassed Q3 2009’s $2.10 EPS.
In light of BlackRock’s strong performance, the most notable challenge for the company is the continuing effect of outflows and integration costs related to the company’s $13 billion buyout last December of Barclays Global Investors (BGI) and its iShares business.
BlackRock is now the world’s biggest money manager, with assets under management (AUM) totaling an impressive $3.45 trillion as of Sept. 30, up $295.5 billion, or 9%, more than the second quarter, and $2.01 trillion, or 140%, year over year, according to the Q3 2010 earnings release. But merger-related outflows, which totaled $34.4 billion during the quarter, or about 2% of acquired AUM, have brought the total since closing of the BGI transaction to $89.1 billion, about 5% of acquired AUM.
Barclays’ iShares exchange traded funds, with their low-fee index AUM, have accounted for a substantial portion of merger-related outflows, including more than half of those that occurred during the third quarter.
The market’s uncertainty about the potential impact of ETFs on BlackRock’s bottom line has resulted in a drop-off in BLK’s stock price over the course of 2010. BLK shares fell 2.99% in trading Wednesday, closing down 5.22 points to $169.41 per share. The stock has traded as high as $243.80 in the past year.
Still, BlackRock Chairman and CEO Laurence Fink voiced a strong note of confidence in the company in Wednesday’s earnings release and conference call.
“BlackRock’s robust third-quarter results reflected the breadth of our business globally, strong performance in both index and actively managed products, and increasing demand for BlackRock’s unique ability to deliver multi-asset class and risk management solutions to our clients,” Fink said in a statement. “Expansion of our operating margin, particularly given the level of investment we are making in the business, reflects the leveragability of our platform and our continued focus on managing expenses.”
Operating income was $707 million. The operating margin was 33.8%, which included the effect of $17 million of costs related to the launch of a $1.2 billion Build America Bond Trust and $6 million of BGI integration costs.
Net new business during the quarter totaled $50.1 billion, including $52.6 billion in long-term products and $1.8 billion in cash management, partially offset by $4.3 billion of net distributions in advisory AUM.
Also during the third quarter of 2010, BlackRock repurchased approximately 895,000 shares of the 5.1 million shares approved in July to neutralize the dilutive effects of restricted stock units and options. BlackRock’s operating results have allowed the company to fully repay its commercial paper balance during the quarter.
Read about BlackRock’s Q2 2010 earnings at AdvisorOne.com.