Strong Flows and Market Gains Offset Adverse Currency in BlackRock's Fourth Quarter
by Greggory Warren, CFA | Morningstar Research Services LLC | 01-14-22

We expect to increase our fair value estimate for wide-moat rated BlackRock to $960 per share following the company's release of fourth-quarter earnings that were at the upper end of our expectations as well as to adjust for our changing expectations for the U.S. corporate tax rate (which we had been projecting to increase to around 26% as part of the Build Back Better legislation). BlackRock closed out the December quarter with a record $10.010 trillion in managed assets, up 5.8% sequentially and 15.4% on a year-over-year basis. Annualized organic AUM growth of 7.7% during the fourth quarter, and full-year organic growth of 5.7%, was above our long-term annual target range of 3%-5% (and management's own guidance of 5%) as BlackRock generated solid flows from both its active fund and ETF operations.

While average long-term AUM was up 20.7% year over year during the fourth quarter, BlackRock recorded a 16.9% increase in base fee revenue growth as product mix shift (and money market fee waivers) led to a 2.2% decline in the firm's overall realization rate when compared with the prior year's period. Total revenue, meanwhile, was up 14.0% year over year as lower performance fee income was not completely offset by higher distribution, technology, and risk management fees. Top-line growth of 19.6% during 2021 was in line with our forecast 19%-21% range for the full year.

With regards to profitability, BlackRock posted a 30-basis-point increase in adjusted operating margins to 45.2%, leaving it slightly above our projected range of 44%-45% for the full year. Unlike most of the other traditional U.S.-based asset managers we cover, we are projecting an improvement in BlackRock's operating profitability over the next five years, with the firm's adjusted operating margins expected to come in at 45%-47% on average (compared with 44.4% during 2017-21). BlackRock raised its quarterly cash dividend to $4.88 per share, an increase of 18.2% over the prior quarterly dividend.

California Budget Proposal Illustrates Upside for Top Pick Edison International
by Travis Miller | Morningstar Research Services LLC | 01-12-22

We are reaffirming our $71 fair value estimate for Edison International after California Governor Gavin Newsom unveiled his state budget proposal loaded with funding for clean energy investments. We are reaffirming our narrow moat and stable moat trend ratings for Edison.

Edison remains one of the few utilities that trades at a discount to our fair value estimate despite climbing 23% in the fourth quarter, triple the Morningstar U.S. Utilities Index return. Edison is 10% undervalued as of Jan. 12 after our mid-December fair value estimate increase. Management raised the dividend 6% in December, beating our expectations. The stock's 4.3% dividend yield at the new $2.80 per share annualized rate is well above the 3.2% utilities sector average.

We continue to forecast Edison invests $6 billion annually at least through 2025, supporting 6% annual earnings and dividend growth.

Newsom's budget includes several large spending programs that should benefit Edison directly or indirectly. The largest is $6.1 billion to support zero-emissions vehicle growth during the next five years. This is on top of $3.9 billion that was allocated to ZEV investments in the 2021 state budget. Regulators already have approved Edison's plan to invest almost $1 billion in electric vehicle infrastructure, and we expect that to grow.

Edison also might be able to access some of the $2 billion in the budget plan for long-duration energy storage, green hydrogen, industrial decarbonization, offshore wind infrastructure, and other decarbonization projects during the next two years.

The budget also supports the state's $15 billion multi-year funding for climate resiliency, notably wildfire mitigation, in the 2021 budget. Although this won't impact Edison directly, additional state fire-fighting resources could help reduce the severity of future wildfires and reduce the liabilities Edison might face if its equipment sparks a fire.

Enterprise to Acquire Navitas Midstream for $3.25 Billion; We Expect Strong Near-Term Returns
by Stephen Ellis | Morningstar Research Services LLC | 01-10-22

Enterprise Products Partners has agreed to acquire Navitas Midstream for $3.25 billion in cash, to be funded by cash on hand and credit facilities, and the deal is expected to close in the first quarter of 2022. Navitas' assets include over 1 billion cubic feet per day of natural gas gathering capacity and represent Enterprise's entry point into Midland gas and natural gas liquids processing, as its existing assets only include downstream pipes. We think the deal makes sense from a financial perspective, as Enterprise's expected midpoint of $0.20 in distributable cash flow (DCF) per unit from Navitas in 2023 equates to a nearly 14% return on investment (about $441 million in DCF on a $3.25 billion investment). The relatively high returns are likely due to the recent construction of the assets (2018 to present), meaning they are likely located in some of the best areas of the Midland basin with breakevens below $40 a barrel, but also contributions from high oil and gas prices. We will maintain our fair value estimate and wide moat rating for Enterprise while we incorporate the deal into our model, likely alongside Enterprise's upcoming fourth-quarter earnings, where management could also reveal more information about the contract structure. Where the fee floors are set in the contracts are particularly important to maintaining Enterprise's returns if near-term oil and gas prices decline substantially.

The downside is that we do not expect the assets to be particularly moaty, given the high level of competitive intensity in the basin. This is a fact that even Enterprise acknowledged in the past as a reason why it did not own Midland G&P assets. While contracts tend to be long term, acreage dedication contracts are dependent on producer solvency, activity, and acreage economics, and building G&P assets have a low barrier to entry, as evidenced by the relatively quick build-out of Navitas.

Excellent Q4 for Wells Fargo as Expense Initiatives Remain on Track, Rate Sensitivity Coming Through
by Eric Compton, CFA | Morningstar Research Services LLC | 01-14-22

Wells Fargo reported solid fourth-quarter earnings per share of $1.38, beating the FactSet consensus of $1.11 and our own estimate of $1.15 (after making some tax rate adjustments). Revenue came in at $20.9 billion compared with consensus of $18.8 billion, while our estimate was a bit lower at $18.4 billion. The beat was primarily attributable to higher-than-expected net interest income and fee income.

NII came in higher than our expectations at $9.3 billion, as curve steepening likely helped, while the bank also made some securitized loans during the quarter. Fees were strong as the bank recorded $2.5 billion in gains from its venture capital/private equity business, along with gains of $943 million from the sale of the asset-management and corporate trust businesses.

The biggest focus for Wells Fargo remains its net interest income sensitivity, expense base progress given cost-cutting initiatives and regulatory investments, and progress on its regulatory issues. Overall, we think investors will react positively to the Jan. 14 earnings given the quarterly beat, expense plans staying on track, and the extra rate sensitivity coming through in what we expect to be 8% growth in NII in 2022, even without material balance sheet growth. We expect to raise our fair value estimate to at least $61 per share based on our updated tax assumptions, with potentially another several dollars coming through as we update our rate assumptions and other assumptions. We look forward to more details on the earnings call.

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