Outflows Mar T. Rowe Price's 3Q Results

There was little in wide-moat T. Rowe Price's TROW third-quarter results that would alter our long-term view of the firm. We are leaving our $125 per share fair value estimate in place. The company closed out the September quarter with a near-record $1.310 trillion in managed assets, up 7.4% sequentially and 16.3% on a year-over-year basis. Net outflows of $5.3 billion during the quarter were worse than our expectations, as well as the positive $2.4 billion quarterly run rate we've seen for net flows from the firm since the end of the 2008-09 financial crisis. Target-date funds saw an uncharacteristic $5.5 billion in outflows during the third quarter (which is likely why the stock is trading down hard today), marking the second straight quarter of outflows from what has been a reliable growth vehicle for the firm over the past decade. This could be a sign, in our view, that the firm is losing share to lower-cost passively managed target date offerings in the retirement market.

While average AUM was up 14.4% year over year during the September quarter, T. Rowe Price reported an 11.9% increase in third-quarter revenue when compared with the prior year's period, due to product mix shift and a slight decline in the firm's effective fee rate to 0.455% (from 0.461% during the year-ago period). Year-to-date top-line growth of 7.8% was in line with our full-year forecast calling for a mid- to high-single-digit revenue increase. As for profitability, adjusted GAAP operating margins of 44.5% during the first three quarter of 2020 were about 90 basis points higher than the year-ago period, as expenses rose at a slower rate than revenues. Our current five-year forecast calls for operating margins in a 40% to 44% 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).

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.