Positive Flows and Market Gains Lift BlackRock's AUM to Record $7.430 Trillion in Fourth Quarter
by Greggory Warren, CFA | Morningstar Research Services LLC | 01-15-20

While there was little in wide-moat BlackRock's fourth-quarter earnings to alter our long-term view of the firm, we expect to increase our fair value estimate to $550 per share to account for our expectations for better AUM levels and fees than we had been forecasting for the near to medium term. BlackRock closed out the December quarter with a record $7.430 trillion in managed assets, up 6.7% (24.3%) sequentially (year over year), with both organic growth and market gains contributing to AUM growth during the period. Net long-term inflows of $99.0 ($335.7) billion during the quarter (full year) were fueled by $20.6 ($109.9) billion of active fund flows, $3.2 ($42.3) billion of inflows from the firm's institutional index business and $75.2 ($183.5) billion in inflows from iShares. BlackRock's annual organic growth rate of 6.1% during 2019 was better than both management's ongoing annual organic growth rate target of 5% and our long-term forecast calling for 3%-5% annual organic AUM growth. Average long-term AUM growth of 4.3% (16.1%) sequentially (annually) during the fourth quarter translated into an 11.2% (1.9%) increase in base fee revenue growth, as the company lapped a really difficult fourth quarter of 2018 (which also suppressed top-line growth the first couple of quarters of 2019). Total revenue was up 15.8% when compared with the prior-year's quarter and increased 2.4% on a full-year basis (better than our forecast calling for flattish revenue growth during 2019--much of which can be tied to stronger performance fee and technology and risk management revenue). As for profitability, BlackRock posted a 20-basis-point (70-basis-point) decline in full-year operating margins (when looked at on an adjusted basis) to 38.2% during 2019. Even so, we continue to project a slight expansion in the firm’s operating margins during 2020-24, driven not only by the increased scale of BlackRock's operations but the efficiencies created by ongoing technology investments.

Comcast Underwhelms With Peacock Projections, but Optionality Remains Key
by Michael Hodel, CFA | Morningstar Research Services LLC | 01-17-20

Comcast fleshed out NBC Universal's planned Peacock streaming service at an analyst event, outlining offerings and financial expectations. We continue to view Peacock primarily as a defensive product, designed to protect NBCU's television distribution and advertising revenue streams as consumer habits evolve. Like AT&T's HBO Max, Peacock is designed to provide a platform to develop new types of relationships with consumers and provide an avenue to maintain audience sizes should the decline in the traditional pay-TV ecosystem accelerate. In exchange for this optionality, NBCU says it will make more content available to consumers, an investment it believes will cost a relatively modest $2 billion over the next two years. While management expects Peacock to break even by 2024, we expect margins in the television business to decline permanently over the next few years as more firms chase top-tier content. We believe Comcast warrants a wide moat based on the strength of its core cable business and we view shares as roughly fairly valued.

Unlike HBO Max, Peacock will lead with a free ad-supported tier with limited content designed to minimize barriers to adoption and help build a following for new shows. Peacock Premium, which will include the full slate of programming, will cost $5 per month, or $10 without ads. Surprisingly, NBCU only expects to hit 30 million-35 million active accounts by the end of 2024, despite making the ad-supported premium service available for free to 24 million Comcast and Cox cable customers at launch, with plans to add more distribution partners. AT&T, in contrast, expects to approach 50 million HBO Max customers by 2024, building on a larger base of 34 million subscribers but at a far more expensive $15 price. At this point, we believe these firms are lobbing out forecasts to manage expectations, knowing that their offerings will evolve with consumer demand and competition.

Interestingly, NBCU says it will make the ad-supported version of Peacock Premium available for free to Comcast's Internet-only customers using its Flex streaming box. NBCU indicated it may also make the service available to other cable companies to offer to their broadband-only customers. This move is at odds with notion that Comcast would use Peacock to support the traditional television bundle and seems strange to us. Comcast doesn't need help competitively in the Internet-access business, given the strength of its network relative to its phone rivals in most locations. While we understand the desire to build a wide audience for Peacock, NBCU still needs to maintain the relative attractiveness of the core traditional television offering while adequately monetizing those customers who want its entertainment content but don't value marquee news and sports enough to take the big cable bundle.

NBCU expects Peacock will generate $2.5 billion in 2024, a very modest amount relative to the roughly $18 billion it brought in during 2019 from cable and broadcast advertising and affiliate and retransmission fees. As with the customer forecast, we suspect the 2024 projection has a large margin for error and is subject to change. Still, the dramatic difference in size between the two businesses illustrates the fine line that NBCU and its television bundle peers are walking. The challenges facing the traditional cable bundle are complex and encompass factors outside of the firms' control, including the paths that major sports leagues take with their rights offerings. Creating and preserving optionality is critical for NBCU even if the cost is high.

Wells Reports a Tough Fourth Quarter: More Legal Charges, and Future Expense Outlook Is Cloudy
by Eric Compton, CFA | Morningstar Research Services LLC | 01-14-20

Wide-moat Wells Fargo reported poor fourth-quarter results, largely attributable to a $1.5 billion legal charge in the quarter as well as elevated expenses in other parts of the bank. While we hadn't made any predictions about the amounts of future operating losses, we did expect that several outsize legal charges were on their way, which is exactly what happened in both the third and fourth quarters. Given that the bank has not announced a final wave of settlements, we think it is important for investors to brace for more potential charges.

Wells also missed its overall expense guidance, which excludes excess operating losses. Adjusted noninterest expense came in at $53.7 billion compared with a goal of $53 billion. Overall, we think it is important to focus on what information was actually new versus the information that was simply negative, but predictable. Booking more legal charges was somewhat predictable, although the exact amount was a new piece of information. Missing expense guidance was also a new piece of disappointing information, although it seems that the reasons for the miss are arguably transient (outside professional services, impairments and write-downs, and severance charges). We'll be eagerly awaiting a new outlook from management as it completes internal reviews, but in the meantime, besides bumping up our operating loss outlook for the medium term, we don't see much that has fundamentally changed.

We think it is clear that Wells is still a work in progress, and that progress will takes years, not months. After making several adjustments to our projections, largely related to slightly higher expenses in the future, we are lowering our fair value estimate to $56 per share from $57.

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