BlackRock definitely passes the initial requirements of both the Defensive Investor and the Enterprising Investor. The Defensive Investor’s only concern is the high PEmg ratio, while the Enterprising Investor has slight concerns regarding the level of debt relative to the net current assets. Neither investor type is sufficiently disturbed by the financials and all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.
When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $7.56 in 2010 to an estimated $15.97 for 2014. This is a fairly strong level of demonstrated growth which is well above the market’s implied estimate for earnings growth of 6.11% over the next 7-10 years. In fact, the historical growth is around 22% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, and therefore returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.
Be sure to check out previous ModernGraham valuations of BlackRock Inc. for more perspective!