T. Rowe Price Enters 2021 With Record AUM

We've increased our fair value estimate for T. Rowe Price TROW to $170 per share from $125 to account for the continued recovery in the equity, credit, and currency markets following the steep COVID-19-induced sell-off in the March quarter of 2020. Roughly half the change comes from our belief that T. Rowe Price will have more in assets under management during 2021-25 than we previously forecast (especially after adjusting for the timing and severity of near-term market corrections), with the remainder coming from a slightly better fee and margin outlook as well as a slightly lower statutory tax rate (we had expected to see a greater push to increase the U.S. corporate tax rate in the near term). Our fair value estimate implies a P/E multiple of 15.0 times our 2021 earnings estimate and 14.8 times our 2022 earnings estimate, which on a multiple basis is in line with our previous fair value estimate.

T. Rowe Price closed out 2020 with a record $1.470 trillion in managed assets, up 12.2% sequentially and 21.9% year over year. Net inflows of $2.2 billion during the fourth quarter were better than our expectations and on par with the $2.3 billion quarterly run rate we've seen from the firm since the end of the 2008-09 financial crisis. While average AUM was up 20.0% year over year during the December quarter, T. Rowe Price reported an 18.0% increase in fourth-quarter revenue compared with the prior-year period due to product mix shift and a slight decline in the firm's effective fee rate. Full-year top-line growth of 10.5% was better than our forecast of mid- to high-single-digit growth. Adjusted GAAP operating margins of 44.2% during 2020 were 170 basis points higher than the year-ago period, as expenses rose at a slower rate than revenue. Our new five-year forecast calls for margins of 44%-46% even as the firm invests in key regions and channels to help drive growth.

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