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Why Blackstone’s Valuation Gap Could Fall

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Declining premiums

The alternative asset management industry’s operating performance declined in 2015 due to falling equities and asset classes. Blackstone (BX) reported an economic income of $520 million for the second quarter of 2016, higher than the previous quarter and 2Q15. The company registered strong growth due to real estate and credit holdings. The company’s distributable earnings were $503 million, or $0.42 per share, in 2Q16, a fall of 51% from the same period last year. The realized performance fees stood at $353 billion in 2Q16.

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Expected rebound in valuations

Blackstone’s stock has fallen 6% over the past month and 36% over the past year. The decline has mainly been due to lower expected earnings on weak holding performance. The company had its best quarter in 1Q15. 2Q16 saw some rebound in operating performance, and the momentum is expected to continue for the second half of 2016. Blackstone’s valuation stood at 11x on a one-year-forward-earnings basis while peers were trading at 13.5x. The stock started trading at a discount due to a rebound in other alternatives.

Alternative asset managers are trading at a discount compared to traditional asset managers such as BlackRock (BLK), Bank of New York Mellon (BK), and Franklin Resources (BEN).

Diversified forward story

Blackstone’s focus on the performance of its portfolio companies and constant offerings to its network of limited partners could remain important factors in the company’s future performance. Diversification through offerings such as hedge funds, credit, and advisory services could lower Blackstone investors’ general risk perception. Debt markets should generate returns in the range of 7%–9%.

If equity attractiveness rises, the overall perception of alternative asset managers should as well, especially for bigger players that are part of the iShares Dow Jones US Financial ETF (IYF).

From our perspective, Blackstone has likely seen the bottom in terms of value for its portfolio holdings. The company could benefit from record dry powder (undrawn capital) and an improvement in domestic equity markets, European real estate and debt markets.

To learn more about Blackstone, check out Market Realist’s series The Blackstone Group: Investing with an alternative giant.

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