Goldman Likes BlackRock, But Loves Principal

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

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) and Invesco ( IVZ). 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."

While Goldman is bullish on BlackRock, its favorite asset management play is Principal Financial Group ( PFG), which is a member of the bank's Conviction Buy List. Goldman has a $38 target on Principal, implying that the stock will rise 33%. Unlike with BlackRock, the rest of Wall Street has a less favorable outlook than Goldman. Just five analysts rate Principal "buy," while 13, or 65%, rank it a "hold" and two have "sell" recommendations. Principal is smaller than BlackRock, with a market capitalization of $9.2 billion, compared to BlackRock's $36 billion. It had $328 million of assets under management, at first quarter's end.

Scheduled to report second-quarter results on August 2, Principal is forecasted to have grown adjusted earnings 15% to 73 cents. However, revenue is expected to have dropped 7.5% to less than $2.1 billion. Principal is a well-managed, dividend-paying business, though most analysts aren't impressed. It pays an annual dividend, based on operating performance, distributing 55 cents at the end of 2010, for a 2% yield. But, it hasn't been a performer on earnings. The stock corrected 5.2% and 4.3%, following the last two quarterly reports.

Pending acquisitions of Finisterre Capital, HSBC Afore and Origin Asset Management should prove accretive to earnings. Principal has grown 12-month trailing sales and net income 2.1% and 0.6%, respectively, significantly less than goliath BlackRock's expansion. Thus, Goldman's optimism is contrarian. Still, the unloved asset manager looks cheap, selling at just 8.4-times forward earnings and 0.9-times book value, 35% and 69% industry discounts.

-- Written by Jake Lynch in Boston.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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