Investors who held on to their positions in leading alternative asset manager Blackstone Inc. (NYSE:BX) have outperformed the S&P 500 (SPX) (SPY) since it bottomed out in December 2022. BX buyers nearly regained control of the pivotal $110 resistance level before sellers returned to digest its recent recovery amid market-wide profit-taking.
Blackstone stock’s outperformance against BlackRock (BLK) since December 2022 suggests that buyers have confidence in its well-diversified alternative asset portfolio. Despite its substantial commercial real estate exposure in its AUM, the company is not expected to be troubled by the malaise in office real estate, as it is mainly exposed to the growth in rental housing, data centers, and industrial properties.
Coupled with the ongoing credit tightening in commercial bank lending, Blackstone’s direct lending business is well-primed to benefit, bolstered by the recovery in equity markets. Blackstone’s scale in alternative assets strategy is well-recognized and shouldn’t be understated. Management highlights its data advantage against its peers, allowing it to discern emerging trends early to capitalize. As such, investors in the asset management space should consider making BX one of their core holdings, bolstered by its relative market outperformance over the past five to ten years.
Blackstone highlighted at its July earnings call that AUM recovery is expected to improve despite near-term headwinds. While it reported a 37.6% YoY decline in distributable EPS in the second quarter or FQ2, the revised consensus estimates suggest it could inflect back into growth by FQ4.
Therefore, I believe investors shouldn’t wait until the coast is clear before considering adding exposure to BX. Dip buyers who bought confidently against market pessimism in December 2022 have been rewarded, as they assessed the worst was likely over. As the market is forward-looking, buyers correctly anticipated that Blackstone remains well-placed to benefit from the recovery in investors’ sentiments. With nearly $200B in dry powder, Blackstone has a substantial ability to generate operating leverage, supported by its robust balance sheet. Its net-debt-to-adjusted EBITDA ratio is expected to continue falling through FY24, reaching below 1x.
As such, I believe Blackstone’s scale, healthy funding levels, and data advantage should allow BX to continue outperforming despite its premium valuation against its capital market peers.
BX last traded at a forward distributable EPS multiple of 20x, markedly above its 10Y average of 15x. Seeking Alpha Quant’s “D+” valuation grade corroborates my observation that BX is priced at a premium. However, BX is a growth stock within its industry, with Quant assigning it a “B” growth grade. Analysts’ estimates project Blackstone’s distributable EPS to continue recovering through the FY25 forecast period. As such, BX last traded at an FY25 distributable earnings multiple of 14.7x, suggesting a pretty reasonable medium-term valuation.
Some investors might ask why the market should re-rate BX upward back above its long-term averages, given the malaise in commercial real estate. That’s fair, and I believe it explains why the market has likely discounted Blackstone’s exposure, as seen in its FY25 earnings multiple.
However, if Blackstone can execute its recovery well over the next two years, and we don’t fall into a debilitating recession, I expect the market to re-rate BX subsequently.
BX saw a steep selloff in July 2023 after topping out. However, the higher high market structure is constructive, suggesting that BX could bottom out above the $90 level if buying support is robust.
I assessed that BX’s buy level isn’t optimal from the price action perspective. However, it seems BX is still early in its medium- and long-term recovery, as it remains far below its 2021 highs. While I don’t expect those levels to be breached in the near term, given the commercial real estate challenges, BX’s risk/reward profile seems relatively attractive despite the recent near-term downside.
Investors can consider waiting for a potential re-test of the $90 level before deciding (but no guarantees it would get there). Or they can consider initiating a position at the current level and average down further if a steeper selloff follows.
Given the significant improvement in market conditions and BX’s constructive price action, I’m ready to upgrade my thesis on Blackstone.
Rating: Upgraded to Buy. Please note that a Buy rating is equivalent to a Bullish or Market Outperform rating.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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