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Goldman Likes BlackRock, But Loves Principal

Stocks in this article: BLK PFG BCS GS C STT IVZ

BOSTON ( TheStreet) -- Goldman Sachs (GS - Get Report) is following the pack on Wall Street in praising the better-than-expected results of superstar money manager BlackRock (BLK - Get Report), but it's among the few researchers bullish on less glamorous Principal Financial (PFG - Get Report).

While BlackRock has grown to prominence by managing bond funds that draw institutions and wealthy individuals, Principal has targeted the broader retirement and insurance markets. BlackRock might have cachet, but Principal's shares are cheaper and will likely benefit from several recent acquisitions.

BlackRock, the world's largest money manager, delivered a solid second-quarter report Wednesday. It increased adjusted earnings per share by 27% to $3 and sales by 16% to just over $2.3 billion. Those figures exceeded the consensus estimates by 3.8% and 0.8%, respectively. Founded by Larry Fink in 1988, the firm has accumulated, through both client acquisition and successful investing, more than $3.7 trillion in assets under management.

BlackRock's assets rose 16% year-over-year during the second quarter, helped by its recent purchase of iShares, an exchange-traded fund brand, from Barclays (BCS). Movement towards ETFs, and away from mutual funds, remains a dominant theme in investment markets as active, long-only managers have routinely demonstrated that their higher fees, on average, are unjustifiable. BlackRock's quarterly operating margin widened from 34% to 37%. BlackRock repurchased $2.5 billion of preferred shares from capital-starved Bank of America (BAC) during the latest quarter. The New York-based company funded the purchase with $2 billion of debt and $500 million of commercial paper, reshuffling its balance sheet.

BlackRock is highly-rated by researchers, with 14 "buy" ratings, two "hold" calls and just one "sell" rating. The stock's aggregate score, derived by assigning value to its different ratings, is higher than those of competitors, including fellow S&P 500 components State Street (STT - Get Report) and Invesco (IVZ - Get Report). Analysts' median 12-month target, at $231.92, implies a pending return of 24%. Citigroup and Goldman Sachs are more bullish, with targets of $255 and $239.

Goldman was encouraged by BlackRock's quarterly results and reiterated its earnings and price targets as the company exceeded the researcher's top- and bottom-line forecasts. Specifically, the bank was impressed by a basis point improvement in the fee rate, coupled with lower expenses, which drove operating income higher. Skittish investors still present a headwind and fund flows are "choppy" with "$10 billion of merger-related outflows and about $15 billion of cash and advisory outflows." These moves were offset by $18 billion of net long-term flows, which moves into "ETFs, multi-asset products and index equities."

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