Shift To Lower-Fee ETFs And Higher Costs Will Challenge Prospects Ahead

Key Takeaways

• Ongoing net outflows and decreased fee rates in lower-fee products may challenge revenue growth and pressure net margins.
  
• Short-term earnings may be impacted by real estate costs and investments in new growth areas like ETFs and insurance.
  
• Strategic market expansions, successful partnerships, and strong product performance support T. Rowe Price's revenue growth and investment appeal.

Catalysts

A publicly owned investment manager.

• T. Rowe Price is facing ongoing net outflows, although they have been reduced from previous years. This could suggest potential challenges in maintaining or growing revenue if outflows continue to outpace inflows, particularly if the market environment remains challenging.
  
• The company's effective fee rate has decreased due to a shift in asset mix toward lower-fee products such as ETFs and institutional separate accounts. This could compress net margins as revenue from fees may grow at a slower pace or decline.
  
• T. Rowe Price is undergoing a real estate transition with a new headquarters move, contributing to higher operating expenses in the short term. This is expected to impact earnings while the company incurs double rent costs and manages the transition.
  
• The emphasis on expanding in lower-fee strategic areas and the competitive landscape may cause sustained pressure on overall fee revenues, potentially impacting future earnings growth if these strategic areas don't scale as expected.
  
• T. Rowe Price's focus on new growth areas, such as ETFs, alternatives, and insurance, may require significant ongoing investment, which could constrain earnings in the near term if returns on these investments take time to materialize fully.

T. Rowe Price Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming T. Rowe Price Group's revenue will decrease by 0.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.8% today to 28.4% 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 $9.01). The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.2x on those 2028 earnings, up from 11.0x today. This future PE is lower than the current PE for the US Capital Markets industry at 21.0x.
• 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's asset under management (AUM) saw positive developments, such as growing their ETF business significantly, which can lead to increased investment advisory revenue and net inflows.
  
• Their target date funds franchise continues to lead the industry, with significant net inflows, which can bolster revenue growth and net margins.
  
• The company is expanding into new markets and developing strategic partnerships, which may enhance their revenue streams and potentially improve earnings in the future.
  
• T. Rowe Price is succeeding in capturing new opportunities and reducing net outflows, which could support revenue stability and future growth.
  
• Strong investment performance in key products and diversification across various asset classes enhance the company's ability to attract new investments, potentially boosting revenue and earnings.

Valuation

• The analysts have a consensus price target of $109.786 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 $125.0, and the most bearish reporting a price target of just $90.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.9 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $100.66, the analyst price target of $109.79 is 8.3% higher. 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.