How Blackstone Valuations and Story Are Shaping Up for the Future

How's Blackstone Doing Amid Weak Operating Performance?

(Continued from Prior Part)

Declining premiums

The alternative asset management industry’s operating performance declined in 2015 due to declining equities and asset classes. Blackstone (BX) reported an economic income of $371 million for the first quarter of 2016, lower than the previous as well as prior year’s quarter. The strength it saw in the first quarter of 2015 was missing across asset classes and offerings. The company’s distributable earnings were $388 million, or $0.33 per share, in 1Q16, a fall of 69% from the same period last year. The realized performance fees stood at $259 billion in 1Q16.

Declining valuations

Blackstone’s stock has fallen by 16% over the past one month and 43% over the past one year. The decline has been mainly due to lower expected earnings on weak holding performance. The company had its best quarter in 1Q15. Blackstone’s valuation stood at 10.5x on a one-year forward earnings basis, while peers were trading at 13.6x. 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).

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 4%–5%.

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 and European equity and debt markets.

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

Browse this series on Market Realist:

• Part 1 - Has Blackstone Fallen Enough to Start Buying?

• Part 2 - How Did Blackstone’s Private Equity Portfolio Perform in 2Q16?

• Part 3 - Blackstone Attracts Record Capital in the Real Estate Space