In this article, let's take a look at T. Rowe Price Group, Inc. (TROW, Financial), a $20.9 billion market cap company, which operates one of the largest no-load mutual fund and life-cycle fund complexes in the United States.
Firm's Ability to Generate Flows
In the last 20 years, the company has produced impressive AUM and revenue growth, due to its well-known brand, high performance, and positive market conditions. We think this trend should continue by investing in people and systems.
Part of that growth came from its retirement date funds, which generated strong cash. It was effective in avoiding hedge fund and private equity offerings.
With about two-thirds of the company's assets under management are retirement-related, and variable-annuity investment portfolios. Retirement accounts have a high retention rate, which is good for the company.
We believe future growth will come from its target-date retirement fund platform, where the increase was $100 million in the last five years.
Organic growth for these funds are expected to continue to contribute to increases. The free cash flow expands from $1.1 billion last year to close to $1.8 billion by the end of a five-year period forecast.
Investors are starting to move from equities and active equity funds to more conservative assets, and it is possible that AUM growth continues to be positive during 2014. Further, its third-party distribution platform should help with this growth, too.
Global Expansion
T. Rowe opened new offices in countries such as Australia, UAE, and Sweden. Last year, 7% of AUM came from international clients, and it is expected to continue focusing on this growing.
Estimated One-Year Price
According to Yahoo! Finance, the estimated one-year target share price is $90.24, so if you buy shares at current market price ($79.04), your return from price appreciation would be 28.8%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of 44 cents per share each quarter, totaling $1.76 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 2.2%. The total expected return for investing in T. Rowe Price is 31%, which we believe is a very attractive stock return.
Revenues, Margins and Profitability
Looking at profitability, revenue growth by 15.21% led earnings per share to increase in the most recent quarter compared to the same quarter a year ago ($1.13 vs $0.92). During the past fiscal year, the company increased its bottom line. It earned $3.89 versus $3.36 in the previous year. This year, Wall Street expects an improvement in earnings ($4.60 versus $3.89).
The gross profit margin is considered high at 50.91%, and the net profit margin of 31.06% is above that the industry average.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| TROW | T. Rowe Price Group, Inc. | 24.36 |
| KKR | KKR & Co LP | 22.88 |
| BLK | BlackRock Inc | 11.93 |
| BK | Bank of New York Mellon Corp | 7.42 |
| AMP | Ameriprise Financial Inc | 17.44 |
| Ă‚ | Industry Median | 7.43 |
The company has a current ROE of 24.36% which is higher than the industry median. Also, it is higher than the one exhibit by KKR & Co LP (KKR, Financial), BlackRock Inc (BLK, Financial), Bank of New York (BK, Financial) and Ameriprise Financial (AMP, Financial).
In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So, T. Rowe satisfies those levels. It is very important to understand this metric before investing and to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 18.5x, trading at a premium compared to an average of 12.0x for the industry. To use another metric, its price-to-book ratio of 3.96x indicates a premium versus the industry average of 1.0x, while the price-to-sales ratio of 5.67x is above the industry average of 5.32x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $20,429, which represents a 15.4% compound annual growth rate (CAGR).
Final Comment
The U.S. capital market is mature, competitive and subject to intense competition. This sector consists of 10,000 companies with annual revenue of $15 billion and assets under management (AUM) in excess of $13 trillion.
T. Rowe Price is one of the larger U.S.-based asset managers with more than $700 billion in AUM, and we believe it is well-positioned in the industry to generate some of the strongest organic growth.
Hedge fund gurus including Chuck Royce (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and John Rogers (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as First Pacific Advisors (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
