Our Fair Value and Long-Term View for T. Rowe Remains

There was little in wide-moat T. Rowe Price's TROW first-quarter results that would alter our long-term view of the firm. We are leaving our $114 per share fair value estimate in place. T. Rowe Price closed out the March quarter with a record $1.009 trillion in managed assets, down 16.4% sequentially and 6.7% on a year-over-year basis. Net outflows of $6.0 billion during the quarter were on par with our expectations, and well off the positive $2.4 billion quarterly run rate we've seen for net flows at T. Rowe Price since the end of the 2008-09 financial crisis. Target-date funds still pulled in $300 million on a net basis during the first quarter, despite the pressure from more volatile equity and credit markets.

While average AUM was up 11.4% year over year during the March quarter, T. Rowe Price reported a 10.2% increase in revenue when compared with the prior year's period, due to product mix shift and a decline in the firm's effective fee rate to 0.459% from 0.464% during the first quarter of 2019. At this point, we still expect full-year revenue to decline at a high-single to double-digit rate, driven by our expectations for continued volatility in the equity and credit markets in response to the COVID-19 pandemic.

As for profitability, adjusted operating margins of 44.2% during the first quarter of 2020 were 110 basis points higher than the year-ago period, as expenses rose at a slower rate than revenue during the March quarter. Our current five-year forecast calls for operating margins in a 38% to 40% range, as the firm continues to make upfront investments in key regions and channels to help drive growth (and is likely to continue to take advantage of its better margin profile relative to peers to make additional investments that will help spur organic growth).

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