Net Outflows And Rising Costs Threaten To Undermine Future Revenue Growth

Key Takeaways

• Increased net outflows and declining fee rates in U.S. equity products may negatively impact future revenue and net margins.
  
• Rising operating expenses and ongoing industry changes could affect earnings and potentially impact EPS through strategic buybacks and compensation.
  
• Expansion in alternatives and successful initiatives in active ETFs and retirement can boost revenue and earnings through improved asset attraction and flow dynamics.

Catalysts

A publicly owned investment manager.

• T. Rowe Price is experiencing increased net outflows in U.S. equity products, driven by outflows in growth strategies, and expects additional net outflows due to typical seasonal patterns and the loss of a large sub-advised variable annuity mandate. This could negatively impact future revenue.
  
• There is a decline in the annualized effective fee rate, influenced by assets moving into lower fee vehicles and asset classes. This is anticipated to reduce future revenue growth and the net margins.
  
• Operating expenses are expected to rise by 6% to 8% over 2023 levels due to increases in compensation, benefits, and distribution and servicing fees. This could lead to higher costs impacting net margins.
  
• T. Rowe Price’s Variable Annuity business has been experiencing net outflows, which are expected to continue as the industry undergoes structural changes, potentially affecting earnings.
  
• The company's focus on maintaining a current pace of buybacks while evaluating future repurchasing, combined with a higher stock-based compensation during Q4, could impact earnings per share (EPS).

T. Rowe Price Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming T. Rowe Price Group's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.5% today to 25.8% in 3 years time.
• Analysts expect earnings to remain at the same level they are now, that being $2.0 billion (with an earnings per share of $9.1).
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.1x on those 2027 earnings, up from 12.8x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.6x.
• Analysts expect the number of shares outstanding to decline by 0.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.75%, as per the Simply Wall St company report.

T. Rowe Price Group Future Earnings Per Share Growth

Risks

• T. Rowe Price is showing progress in reducing net outflows, with a target of halving the amount of outflows by the end of 2024. Improved flow dynamics can potentially stabilize or increase revenue.
  
• The company is expanding its active ETF franchise and retirement leadership, which can positively impact long-term revenue growth if these initiatives are successful.
  
• Strong long-term investment performance in key equity and fixed income strategies, such as U.S. mid-cap value and certain ETFs, indicates a potential to attract more assets and improve earnings.
  
• Alternatives, fixed income, and global equity products are experiencing positive net inflows, demonstrating the potential for these segments to contribute positively to revenue and earnings.
  
• Increasing capital commitments in private credit, particularly with the first close of a senior private lending fund, could result in accelerated flows and enhanced revenue from the alternatives segment.

Valuation

• The analysts have a consensus price target of $113.14 for T. Rowe Price Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $129.0, and the most bearish reporting a price target of just $103.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.7 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 6.8%.
• Given the current share price of $117.95, the analyst's price target of $113.14 is 4.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.