With BlackRock trading at a last close of US$964.71, many investors are asking a simple question: is the stock pricing in too much optimism, or is the current level still reasonable value for the long term.

Over the past week the share price declined 8.1%, adding to a 9.9% fall over the last month and an 11.1% decline year to date, even though the 3 year return sits at 49.5% and the 5 year return at 21.8%.

Recent news around BlackRock has focused on its role as a major global asset manager and the influence that scale can have on capital markets, as well as the way large managers are adjusting product line ups and cost bases to respond to changing investor preferences. This context helps explain why the stock can move sharply when sentiment toward fee structures, regulation or fund flows shifts, even without company specific events.

On Simply Wall St’s framework, BlackRock currently records a valuation score of 3 out of 6. The sections that follow will walk through how this score is built using different valuation approaches and then finish with a broader way to think about what the numbers are really saying about the stock’s value.

Approach 1: BlackRock Excess Returns Analysis

The Excess Returns model looks at how much value BlackRock creates over and above the return that equity investors typically require. It compares the company’s profitability on its equity base with its estimated cost of equity to see whether each dollar of book value is generating extra economic value.

For BlackRock, the model uses a Book Value of $364.87 per share and a Stable EPS of $60.30 per share, based on weighted future Return on Equity estimates from 7 analysts. The estimated Cost of Equity is $29.39 per share, which implies an Excess Return of $30.91 per share. That excess is built on an Average Return on Equity of 16.19% and a Stable Book Value of $372.36 per share, using estimates from 4 analysts.

When these excess returns are projected forward and discounted, the model points to an intrinsic value of about $1,082.56 per share. Compared with the recent share price of US$964.71, this implies the stock is about 10.9% undervalued on this method.

Result: UNDERVALUED

Our Excess Returns analysis suggests BlackRock is undervalued by 10.9%. Track this in your watchlist or portfolio, or discover 44 more high quality undervalued stocks.

Approach 2: BlackRock Price vs Earnings

For a profitable company like BlackRock, the P/E ratio is a useful way to link what you pay per share to the earnings the business is currently generating. Investors usually accept a higher P/E when they expect stronger earnings growth or see lower risk in those earnings, and look for a lower P/E when growth expectations are modest or risks feel higher.

BlackRock currently trades on a P/E of 23.94x. This sits below the broader Capital Markets industry average P/E of 39.75x, and above the peer group average of 16.36x. To move beyond simple comparisons, Simply Wall St also calculates a “Fair Ratio” for BlackRock of 18.82x. This is a proprietary estimate of what the P/E might be, given factors such as earnings growth, industry, profit margins, market cap and company specific risks.

This Fair Ratio can give a more tailored view than a straight peer or industry comparison, because it adjusts for differences in growth profiles, risk and profitability, rather than assuming all companies in a sector deserve similar multiples. Set against the actual P/E of 23.94x, BlackRock screens as more expensive than this Fair Ratio suggests.

Result: OVERVALUED

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Upgrade Your Decision Making: Choose your BlackRock Narrative

Earlier it was mentioned that there is an even better way to understand valuation. Narratives on Simply Wall St let you attach a clear story about BlackRock to the numbers by linking your view of its future revenue, earnings and margins to a financial forecast, a fair value, and a simple comparison with the current share price. This is all within an easy-to-use tool on the Community page that updates automatically when new earnings or news arrive. This helps explain why one investor might publish a Narrative that values BlackRock at a fair value of US$1,318.96 based on a 10% revenue growth rate, 45% profit margin and 25x future P/E, while another might set fair value at US$1,160.32 using different assumptions such as a 9.17% revenue growth rate, 22.93% profit margin and 32.49x future P/E.

Do you think there's more to the story for BlackRock? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.