T. Rowe's Weak Q3 Overshadowed by Oak Hill Acquisition

While there was little in wide-moat-rated T. Rowe Price's TROW third-quarter results that would alter our long-term view of the firm, we expect to increase our fair value estimate to $211 per share from $202 to account for adjustments to our near- to medium-term forecasts, including the company's announced purchase of alternative credit manager Oak Hill Advisors. T. Rowe Price closed the September quarter with $1.612 trillion in managed assets, down 0.7% sequentially but up 23.0% year over year. Net outflows of $6.4 billion were on par with the $5.8 billion in outflows in the prior-year period and marked only the 17th time that T. Rowe Price has reported quarterly outflows in the past two decades (half of which have occurred during the past five years as the company feels the brunt of the baby boom retirement phase). With average assets under management up 27.5% year over year during the third quarter, T. Rowe Price reported a 22.5% increase in net revenue from the prior-year period, owing to product mix shift and a slight decline in the effective fee rate. Year-to-date top-line growth of 27.6% was slightly above our full-year forecast, but we expect things to moderate some in the fourth quarter. Adjusted operating margins of 49.9% during the first nine months of 2021 were 540 basis points higher than the year-ago period and in line with our projections. With regard to the Oak Hill Advisors acquisition, it looks as if T. Rowe Price is paying a decent premium (midteens enterprise value/EBITDA multiple) for a firm that will contribute $53 billion in primarily alternative credit AUM earning fees (including performance fees) of around 100 basis points on average. The deal will not only offer some diversification away from the fee pressures from low-cost passive funds but also expand T. Rowe Price's global reach. Management expects it to be slightly accretive to 2022 earnings, which we expect to reflect in our modeling of the deal.

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