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T. Rowe Price (TROW) Rides on AUM & Revenues, Costs Rise

·3 min read

Organic growth and a diversified business strategy are key strengths for T. Rowe Price Group, Inc. TROW. However, elevated operating expenses and increased dependence on investment advisory fees might affect the company’s financials in the near term.

The company’s net revenues witnessed a compound annual growth rate (CAGR) of 12.1% over a five-year period (ended 2021). While the same decreased in the first half of 2022 due to the impact of declining markets on the assets under management (AUM) balance, the company’s strategy to enhance investment capabilities and expand the distribution channels will keep supporting long-term revenue growth.

After completing the OHA acquisition in December 2021, T. Rowe Price expanded its offerings in the alternative investment market space. As the company continues to shift its mix toward international growth funds, this will likely help increase both revenues and investment management margin in upcoming periods.

T. Rowe Price is a debt-free company with a strong liquidity position, which supports its capital deployments. In fact, it has hiked quarterly dividends every year since its IPO in 1986. Also, the board of directors exercised several shares repurchase plans consistently. Thus, such efforts reflect the company’s commitment to enhancing shareholder value.

However, rising operating expenses are a major concern for the company. Expenses saw a four-year (2018-2021) CAGR of 9.6%. As TROW continues to incur expenses to attract new clients and make additional investments from existing clients, its ability to expand the bottom line might get hampered.

T. Rowe Price’s major chunk of revenues comes from investment advisory fees. This type of strong dependence might affect the company’s financials in the near term because the AUM changes with market fluctuations, regulatory changes, or a sudden slowdown in business activities.

Further, the bulk of assets managed by T. Rowe Price is invested in U.S. equities, which seems to be another concerning factor. Despite the company’s effort to adopt various strategies to diversify its product mix, concentration in U.S. equities is a significant risk that could result in erratic asset flows.

Shares of this Zacks Rank #3 (Hold) company have lost 37.1% compared with the 12.6% decline recorded by the industry.
                   

Zacks Investment Research
Zacks Investment Research


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Stocks to Consider

A couple of better-ranked asset management stocks are PennantPark Floating Rate Capital Ltd. PFLT and Blue Owl Capital Inc. OWL. Currently, PFLT and OWL carry a Zacks Rank # 1 (Strong Buy) and 2 (Buy), respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.

Pennant Park’s current-year earnings estimates have been revised 2.5% upward over the past 30 days. PFLT’s shares have lost 5.2% over the past year.

The consensus estimate for Blue Owl Capital’s current-year earnings has been revised 1.9% north over the past 30 days. Over the past six months, OWL’s shares have gained 3.8%.


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