ETF And Alternative Investments Will Shape Markets Despite Fee Concerns

Key Takeaways

• Strategic ETF and alternative investment expansion is set to boost assets under management, enhancing revenue and earnings growth through higher fees.
  
• Partnerships and personalized retirement products aim to increase revenue opportunities, leveraging new markets and improving client engagement worldwide.
  
• Intense competition and fee compression are challenging revenue growth, while significant net outflows and market difficulties threaten margins and earnings.

Catalysts

A publicly owned investment manager.

• T. Rowe Price is growing its ETF business, tripling its net inflows in 2024 to $4.7 billion, indicating potential revenue and earnings growth due to increased assets under management in this segment.
  
• The company is leveraging strategic partnerships, such as with Aspida, to manage both public and private assets, suggesting increased revenue opportunities in the insurance sector, which may positively impact net margins if high-value assets are managed effectively.
  
• T. Rowe Price is focusing on expanding its alternative investments business, including launching funds and securing meetings with advisers, expected to enhance performance-based fees and support net earnings growth as alternative investments often come with higher fees.
  
• The emphasis on personalized and innovative retirement products, including digital tools like the Social Security Optimizer, aims to drive inflows into their target date franchise. This could boost assets under management, thus increasing advisory fee revenues.
  
• Ongoing efforts in expanding global reach and improving client engagement, such as increased access to financial advisers and new advertising strategies, are expected to raise gross sales and potentially drive revenue and earnings growth as the brand reaches more clients worldwide.

T. Rowe Price Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on T. Rowe Price Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming T. Rowe Price Group's revenue will grow by 3.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 28.8% today to 25.0% in 3 years time.
• The bullish analysts expect earnings to remain at the same level they are now, that being $2.0 billion (with an earnings per share of $9.01). The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 16.0x on those 2028 earnings, up from 9.7x today. This future PE is lower than the current PE for the US Capital Markets industry at 24.5x.
• Analysts expect the number of shares outstanding to decline by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.14%, as per the Simply Wall St company report.

T. Rowe Price Group Future Earnings Per Share Growth

Risks

• T. Rowe Price experienced significant net outflows of $43.2 billion in 2024, primarily driven by a large sub-advised variable annuity redemption, which could impact both its revenue and net margins.
  
• The company has seen elevated redemptions in higher fee mutual funds and sales in lower fee vehicles, resulting in fee compression that reduces investment advisory revenues and net margins.
  
• With a large portion of sales occurring in strategies with lower-than-average fee rates, there is potential for reduced net revenue growth, impacting overall earnings.
  
• Despite improvements, the intensely competitive environment and continued fee pressure may limit the pace of revenue growth and compress net margins.
  
• With ongoing market challenges making alpha generation difficult, reliance on strong investment performance to drive positive flows creates uncertainty around future revenue and earnings growth.

Valuation

• The assumed bullish price target for T. Rowe Price Group is $115.7, which represents two standard deviations above the consensus price target of $91.38. This valuation is based on what can be assumed as the expectations of T. Rowe Price Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $125.0, and the most bearish reporting a price target of just $78.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $7.8 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 7.1%.
• Given the current share price of $88.86, the bullish analyst price target of $115.7 is 23.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.