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T. Rowe Price: Lowering Fair Value Estimate 7% on Weaker Performance and Flows in September Quarter

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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.

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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