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BlackRock Inc. drew a downgrade to neutral from buy at JPMorgan on Friday as analysts said the stock appears to have reached a full valuation as it faces market-share pressure in its exchange-traded-fund business.
BlackRock’s stock
BLK,
fell back by 0.7% on Friday after a strong performance in recent months on rising sentiment that the asset-management giant will be the leading beneficiary of investor movement into fixed-income products and exchange-traded funds, or ETFs.
Prior to Friday’s trades, the stock had moved up by 25% in the fourth quarter, outpacing the 10.3% rise by the S&P 500
SPX
and gain of 14% by stocks in traditional investment managers.
“While we agree with the thesis that a falling rate environment makes fixed income more attractive and that we expect to see some transition to fixed income, we don’t expect the magnitude of the transition will be enough to justify further BlackRock share price outperformance,” said JPMorgan analyst Ken Worthington.
In addition to that headwind, BlackRock’s iShares ETF business is losing market share to passive ETFs from Vanguard and others, as well as to actively managed ETFs, where BlackRock has a smaller market share, analysts said.
The economic cycle is also becoming less favorable for stock ETFs.
“Given iShares has been such an important driver of BlackRock organic growth, a shift from secular to more cyclical growth drivers could weigh further on growth,” Worthington said. “Given the outperformance of the shares together with some potential headwinds not well considered by investors, we move to a neutral rating.”
JPMorgan analysts continue to regard BlackRock as best in class compared with traditional asset-management peers.
However, analysts are ” incrementally cautious on slowing organic growth from less secular tailwinds, ongoing market share losses in the equity ETF business, and heightened expectations for fixed income flows,” Worthington said.
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