Shares of BlackRock, the world's largest money manager, are undervalued by about 20 percent even if the firm has to cut fees on its popular iShares line of exchange-traded funds, according to an analyst report issued on Wednesday.
New York-based BlackRock has been losing ETF market share to lower-priced funds from Vanguard Group for several years. Chief Executive Laurence Fink said in July that BlackRock had a plan in the works to combat Vanguard but provided no details.
The most likely move would be targeted price cuts on ETFs that face direct competition from Vanguard, Bernstein research analyst Luke Montgomery wrote in a report on Wednesday.
Cuts of that magnitude could reduce BlackRock's future earnings per share by about 3 percent to 7 percent, Montgomery said. But BlackRock could still attract enough customers to its funds to increase assets under management by up to 1 percent a year, making the stock worth about 20 percent more than the current price of close to $177, he said.
"We maintain our Market-Perform rating, but conclude the potential impact of ETF price cuts is not significant enough by itself to justify the discount in the stock," Montgomery concluded.
BlackRock would need to trade at a 30 percent discount to be rated 'outperform,' under Bernstein's typical criteria, Montgomery said.
Shares of BlackRock gained 35 cents, or 0.2 percent, to $177.28 in morning trading on the New York Stock Exchange on Wednesday.
The shares have gained less than 2 percent since May 18, when British bank Barclays Plc announced it would sell its $6.1 billion stake in BlackRock. Barclays acquired the stake in 2009 when it sold its Barclays Global Investors unit, which included iShares, to BlackRock.
Shares of major competing firms have done better over the same period. Since May 18, Invesco's stock is up 10 percent, shares of Franklin resources have gained 9 percent and T. Rowe Price group's stock price has risen 7 percent. The Standard & Poor's 500 Index is up 8 percent over the same period.
BlackRock managed $3.6 trillion including $645 billion of ETFs at the end of June. That compares with $1.8 trillion mutual fund assets and $209 billion ETF assets at Vanguard.
(Reporting by Aaron Pressman, editing by Dave Zimmerman)