T. Rowe Price: Lowering Fair Value Estimate 7% on Weaker Performance and Flows in September Quarter
We’ve lowered our fair value estimate for wide-moat-rated T. Rowe TROW Price to $110 per share from $118 to account for revised near-term expectations about assets under management, revenue, and profitability since our last update. We view the shares as being slightly undervalued.
Based on preliminary AUM data released for September, T. Rowe Price closed out the third quarter of 2023 with $1.346 trillion in managed assets, down 3.8% sequentially but up 9.6% year over year and 5.6% since the start of the year. Total estimated outflows of $53.5 billion during the first nine months of 2023 was indicative of a negative 5.6% organic AUM growth rate, worse than the negative 3.9% rate of growth generated during 2022 when T. Rowe Price was facing the bulk of the growth equity market downturn, as well as rapidly rising short-term interest rates.
We expect more headwinds in the near term as the credit and equity markets remain volatile, which will likely keep organic AUM growth in negative low- to mid-single-digit territory during 2023 and 2024.
Although average AUM looked to be up 4% year over year during T. Rowe Price’s third quarter, we expect the firm to struggle to generate positive top-line growth this year, with our expectations for full-year revenue growth in a negative 2%-0% range (down from negative 1%-0% previously). Our five-year forecast (which includes another equity market correction near the end of our projection period) has revenue declining at a low-single-digit rate on average annually during 2023-27.
As for profitability, T. Rowe Price’s adjusted GAAP (non-GAAP) operating margins of 31.8% (35.7%) during the first half of 2023 were 1,280 (240) basis points lower (higher) year over year, reflecting the negative side to the operating leverage in the asset manager’s business model. We are now projecting adjusted GAAP (non-GAAP) operating margins of 31%-36% (32%-37%) during 2023-27—about 50 basis points lower on average than our previous forecast.
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