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Why does BlackRock trade at a premium?

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Feb. 13 2015, Updated 12:05 a.m. ET

Valuation metrics

Over the years, BlackRock (BLK) has been trading at a premium—compared to other companies and the industry average. Its price-to-earnings ratio over the past five years as been in the range of 16–19x. The industry’s price-to-earnings ratio—including State Street (STT), Legg Mason, Inc., Goldman Sachs (GS), and other players—has been in the range of 12–15x.

Asset managers are also valued on the basis of EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratios. The company is valued at 12.3x on a one-year forward EV/EBITDA basis—compared to the industry average of 9x.

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Strengths supporting premium

Historically, BlackRock focused more on institutional investors. They’re a stickier set of assets—compared to the retail assets. BlackRock leveraged on this strength. This enabled it to build on the asset base over the years.

BlackRock widened its product line with well-diversified offerings in all types of asset classes across the different end markets. The company has a good mix of size and scale of operations. It also has strong brand positioning. As a result, it’s placed well ahead of its peers.

This translated into a higher return on equity over the last few years. BlackRock has a premium in stock prices over its peers.

Performing product line

Through iShares, BlackRock has been able to generate higher returns over the past five years. The company has been a leader in the ETF market. The market witnessed strong growth over the past few years.

Some of BlackRock’s successful ETF offerings include the iShares Core S&P 500 ETF (IVV) and the iShares Russell 1000 Growth (IWF).

BlackRock, when reviewed from ROE (return on equity) and AUM (assets under management) combined, is generating higher returns than other companies—like State Street (STT), Bank of New York Mellon (BK), Goldman Sachs (GS), and Morgan Stanley (MS).

BlackRock’s innovative product line, inorganic growth strategies, and scale have been the main drivers leading to a premium over the industry averages.

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