Company Reports

There was little in wide-moat-rated T. Rowe Price's fourth-quarter results that would alter our long-term view of the firm. We are leaving our $115 per share fair value estimate in place and view the company's shares as being slightly undervalued right now.

All the US-based asset managers we cover have reported their December-quarter earnings, and in some cases revealed assets under management, or AUM, data for January 2024. We now have a better sense of how recent market activity has been affecting results. In our third-quarter earnings wrap, we had assumed that the malaise that had crept into the markets during August-October 2023 might continue through the rest of the year.

In an environment where active fund managers are under assault for poor relative performance and high fees, we believe wide-moat T. Rowe Price is one of the best positioned U.S.-based active asset managers we cover. The biggest differentiators for the firm are the size and scale of its operations, the strength of its brands, its consistent record of active fund outperformance, and reasonable fees. T. Rowe Price also has a stickier set of clients than its peers, with two thirds of its assets under management derived from retirement-based accounts.

We've increased our fair value estimate for wide-moat T. Rowe Price to $115 per share from $100 to account for revised near-term expectations for assets under management, revenue, and profitability since our last update. With the U.S. equity markets rising 12% in the fourth quarter of 2023, and the credit markets also rising 7%, T. Rowe Price saw a 13% increase in its AUM during the period. This not only left the firm in a better position than we had been expecting coming into 2024, but the recovery in equity AUM should lift its overall realization rate, allowing us to raise our fair value estimate as much as we did.

While there was little in wide-moat rated T. Rowe Price's fourth-quarter results that would alter our long-term view of the firm, we expect to increase our $100 per share fair value estimate slightly once we've incorporated the results into our valuation. This would still leave the company's shares close to fairly valued relative to their Feb. 8 trading price.

While the runup in the equity markets the past several weeks is likely to have a positive impact on assets under management for the U.S.-based asset managers, we don't expect it to have too significant an impact on our fair value estimates, which are based on 10-year forecasts for AUM growth, fee rates, revenue, and profitability. As of the Nov. 29 market close, the traditional U.S.-based asset managers we cover were trading at an average price/fair value multiple of 0.97, making them only slightly undervalued, while the alternative-asset managers we cover were trading at an average price/fair value multiple of 1.09. This is far from the margin of safety we would need to recommend these more volatile names to long-term investors.

With all the U.S.-based asset managers we cover having reported quarterly earnings, and in some cases revealing assets under management data for October, we have a better sense of how the ongoing equity and credit market volatility is affecting results. Due to their lack of organic AUM growth—a product of having large exposure to higher-cost, poorer-performing active equity products in a market where low-cost passive products are preferred—most of the traditional U.S.-based asset managers have become dependent on equity market gains to expand their AUM. In an environment where fees are under pressure and profit margins are being affected by a need to spend more to maintain (if not improve) performance and enhance distribution, a precipitous decline in managed assets, like we saw during 2022, has a large negative impact on revenue and profitability, given the amount of operating leverage inherent in the asset manager business model.

In an environment where active fund managers are under assault for poor relative performance and high fees, we believe wide-moat T. Rowe Price is one of the best positioned U.S.-based active asset managers we cover. The biggest differentiators for the firm are the size and scale of its operations, the strength of its brands, its consistent record of active fund outperformance, and reasonable fees. T. Rowe Price also has a stickier set of clients than its peers, with two thirds of its assets under management derived from retirement-based accounts.

While there was little in wide-moat-rated T. Rowe Price's third-quarter results that would alter our long-term view of the firm, we expect to lower our $110 per share fair value estimate 5%-10% to account for the impact that continued equity and credit market headwinds will have on results in both the near and long term.

We've lowered our fair value estimate for wide-moat-rated T. Rowe 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.

In an environment where active fund managers are under assault for poor relative performance and high fees, we believe wide-moat T. Rowe Price is one of the best positioned U.S.-based active asset managers we cover. The biggest differentiators for the firm are the size and scale of its operations, the strength of its brands, its consistent record of active fund outperformance, and reasonable fees. T. Rowe Price has historically had a stickier set of clients than its peers as well, with two thirds of its assets under management derived from retirement-based accounts.

In an environment where active fund managers are under assault for poor relative performance and high fees, we believe wide-moat T. Rowe Price is one of the best positioned U.S.-based active asset managers we cover. The biggest differentiators for the firm are the size and scale of its operations, the strength of its brands, its consistent record of active fund outperformance, and reasonable fees. T. Rowe Price has historically had a stickier set of clients than its peers as well, with two thirds of its assets under management derived from retirement-based accounts.

In an environment where active fund managers are under assault for poor relative performance and high fees, we believe wide-moat-rated T. Rowe Price is one of the best positioned U.S.-based active asset managers we cover. The biggest differentiators for the firm are the size and scale of its operations, the strength of its brands, its consistent record of active fund outperformance, and reasonable fees. T. Rowe Price has historically had a stickier set of clients than its peers as well, with two thirds of its assets under management derived from retirement-based accounts.

With the U.S.-based asset managers having reported their latest quarterly earnings, and in some cases revealing assets under management data for the end of July 2023, we have a better sense of the impact the recovery in the U.S. equity markets is having on results. As we've noted in the past, most of the traditional U.S.-based asset managers have become wholly dependent on equity market gains to grow their assets under management, given their lack of organic AUM growth, due to large exposure to higher-cost, poorer-performing active equity products relative to low-cost passive products. In an environment where fees are under pressure and profit margins are being affected by a need to spend more heavily to improve investment performance and enhance distribution, a precipitous decline in managed assets as we saw during 2022 has a large negative impact on revenue and profitability—especially considering the amount of operating leverage inherent in the asset manager business model.

There was little in wide-moat-rated T. Rowe Price's second-quarter results that would alter our long-term view of the firm. The company's adjusted earnings per share of $2.02 for the June quarter was well above the FactSet consensus estimate of $1.73 per share and our own $1.80 forecast. The majority of the outperformance was driven by higher levels of assets under management, or AUM, revenue and operating income than we had projected for the period. We expect to adjust our $110 per share fair value estimate upward slightly as we incorporate these results into our valuation.

There was little in wide-moat T. Rowe Price's first-quarter results that would alter our long-term view of the firm, and we expect to leave our $110 fair value estimate in place. We view the shares as being about fairly valued right now, despite the selloff after the earnings release.

We've lowered our fair value estimate for wide-moat-rated T. Rowe Price to $110 per share from $120 to account for weaker equity and credit market returns in the near term, which will have a negative impact on the company's assets under management, or AUM. T. Rowe Price reported a nearly 25% decline in its managed assets during 2022 as rising interest rates negatively affected growth equities, which make up a major portion of the company's equity platform, leading to both market losses and outflows.

In an environment where active fund managers are under assault for poor relative performance and high fees, we believe wide-moat-rated T. Rowe Price is one of the best positioned U.S.-based active asset managers we cover. The biggest differentiators for the firm are the size and scale of its operations, the strength of its brands, its consistent record of active fund outperformance, and reasonable fees. T. Rowe Price has historically had a stickier set of clients than its peers as well, with two thirds of its assets under management derived from retirement-based accounts.

Despite the U.S. equity markets being up solidly since the start of the year, we are leaving our $120 per share fair value estimate for wide-moat-rated T. Rowe Price in place. We have, however, moved our Uncertainty Rating for the firm to High from Medium, requiring a wider margin of safety before recommending the shares, which are currently slightly overvalued relative to our fair value estimate.

In an environment where active fund managers are under assault for poor relative performance and high fees, we believe wide-moat-rated T. Rowe Price is one of the best positioned U.S.-based active asset managers we cover. The biggest differentiators for the firm are the size and scale of its operations, the strength of its brands, its consistent record of active fund outperformance, and reasonable fees. T. Rowe Price has historically had a stickier set of clients than its peers as well, with two thirds of its assets under management derived from retirement-based accounts.