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T. Rowe Price Earnings: Equity Outflows Offset by Market Gains, Leading to Improved AUM Levels

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T. Rowe Price Group Inc
(TROW)

There was little in wide-moat-rated T. Rowe Price’s TROW 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.

T. Rowe Price closed out the June quarter with $1.399 trillion in managed assets, up 4.3% sequentially and 6.8% year over year. Net outflows of $20.0 billion during the quarter were in line with our expectations, with the company’s growth equity heavy platform reporting outflows of $19.5 billion.

With average AUM being down 3.5% year over year during the second quarter, T. Rowe Price reported a 4.4% decline in fee revenue when compared with the prior year’s period. Net revenue (which includes capital allocation-based income and administrative fees) rose 6.4% year over year during the June quarter. While the firm’s first-half top-line decline of 6.8% was on par with our full-year forecast calling for a mid-single-digit revenue decline during 2023, we may need to adjust our forecast upward given that the company is facing easier comparables in the back half of the year.

As for profitability, first-half adjusted operating margins of 35.7% were 630 basis points lower than the year-ago period, as operating expenses increased at a higher rate than net revenue. Much of this was due to nonbase compensation costs, and technology, occupancy and facility costs being higher when compared with the prior year’s period. We believe that some of this added spending is necessary in more difficult operating environments (especially on the technology and marketing fronts).

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Greggory Warren

Strategist
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Greggory Warren, CFA, is a strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers the traditional U.S.-and Canadian-based asset managers, as well as Berkshire Hathaway.

Before assuming his current role in 2017, Warren covered the financial-services sector as a senior analyst since late 2008. Prior to that time, he covered non-alcoholic beverage manufacturers and distributors, packaged food firms, food service distributors, and tobacco companies. Before joining Morningstar in 2005, Warren worked as a buy-side equity analyst for more than seven years, covering consumer staples and consumer cyclicals.

Warren holds a bachelor's degree in accounting and English from Augustana College. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Society of Chicago. During 2014-19, Warren was selected to participate on the analyst panel at Berkshire Hathaway’s annual meeting, asking questions directly of Warren Buffett and Charlie Munger. The analyst panel was disbanded ahead of Berkshire’s 2020 annual meeting. Warren also ranked second in the investment services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

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