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T. Rowe Price Group (TROW)

Financials
Investment Managers

Rating:
Rating Since: 04/21/2012
Prior Rating:
HOLD
Grade

76.3

Top-Down

SectorNEGATIVE
IndustryNEUTRAL
SentimentNEGATIVE
FundamentalBUY
02/11/2016

$65.48

Dividend Yield
3.18%
52 Wk High
$84.02
Market Cap
16,250.80
52 Wk Low
$64.87
Short Interest
Next Report
04/20/2016

Market Growth LT B-
Market Growth ST D
EPS Growth A+
Growth Potential D
Earnings Impact B+
Earnings Surprise B-

Mixed Growth Record Based on Company's Recent Reports Suggest Investors Use Caution in Buying the Stock
T. Rowe Price Group, which reported $4.24 billion in total revenues for the 12 months ended last quarter, has seen its sales growth rate deteriorate recently. Relative to its $3.06 billion in sales for the 12 months ended three years ago, the latest figure represents a very healthy 38.76% growth rate. However, when comparing its latest quarterly revenue of $1.05 billion to the $1.03 billion from the same quarter a year ago, for a 2.44% year-over-year growth rate, it becomes clear that T. Rowe Price Group's top line growth has decelerated significantly. If this yearly drag on growth continues for a couple more quarters, the company's long term growth grades will fall, affecting our overall rating. If the stock price reflects this decline, it is likely T. Rowe Price Group's rating will improve from the Value perspective, which will actually have a positive impact on its overall rating. The company also reported in its latest earnings announcement that profits had fallen from the year earlier period, reversing a trend of long term profit growth. By long term growth we refer to the change in full year (12-month trailing) net income from the comparable period three years earlier. T. Rowe Price Group's Fourth quarter net fell 4.36% to $298.50 million from the year earlier profit of $312.10 million (excluding extraordinary items) , which contrasts with its growth in 12-month trailing profit over a three year period. Also including last quarter's results, the company's profit grew to $1.20 billion for the 12 months ended December 31, 2015, a 36.92% jump from full year profit of $877.70 million reported for the period ended three years earlier. During the last quarter the company's ongoing margin contraction accelerated, with an average drop in EBITDA, operating and net margins of 5.03% from the year ago period.
     The company's January 28, 2016 earnings report exceeded analyst estimates by 7.34% and pleased investors, who reacted positively to the news causing the stock to rise 7.13% after the announcement. After this report T. Rowe Price Group maintained a positive earnings surprise record over its last six quarters; it has beaten analysts' estimates by 1.80%, on average, over that period, a favorable catalyst for the stock.

 

Capital Structure A+
P/E Analysis A-
Price/Book Ratio A
Price/Cash Flow Ratio A-
Price/Sales Ratio B-
Market Value A-

Company's Shares Are Attractively Priced Considering the Strength of its Overall Fundamentals
T. Rowe Price Group's stock, currently priced at 14.85 times 12-month earnings per share, trades at a 39.57% discount to our "optimum" P/E ratio of 24.57. This is calculated by MarketGrader based on the company's EPS growth rate in the last five years, using reported quarterly figures. By this measure, T. Rowe Price Group's earnings per share have increased at an annualized rate of 12.79% in the last five years. The current strength in the company's financial performance, evidenced by a high overall Profitability grade and such a strong EPS growth rate, is not sustainable unless the recent margin contraction is reversed. Otherwise the stock price may feel downward pressure as earnings growth begins to decelerate. Currently the stock also has a forward P/E of 14.85, which interestingly enough is higher than its trailing P/E but lower than the S&P 500's forward P/E of 15.20. Investors therefore see more value in the company's future earnings but not as much as they see in the market in general; coupled with the company's strong fundamentals, this situation could represent an interesting but risky opportunity, meaning short term volatility with the possibility of handsome returns in the long term.
     T. Rowe Price Group's current market value is 4.98 times its tangible book value, which excludes goodwill and other intangible assets. This is an attractive valuation considering the firm's intangible assets represent only 29.65% of its total stockholders' equity. If these assets are added back into the company's equity its price to book ratio is an even lower 3.51. Relative to the $5.97 in cash flow per share generated by the company in the last twelve months, the stock is attractively priced at 10.97 times cash flow per share considering its strengths across our fundamental indicators. Its price to sales ratio of 3.87 is slightly higher than the Investment Managers's average of 2.99, both based on trailing 12-month sales. Our final value indicator looks at the relationship between the company's current market capitalization and its operating profits after deducting taxes. According to this indicator T. Rowe Price Group's $16.25 billion valuation is reasonable at 12.24 times its most recent quarterly net income plus depreciation.

 

Asset Utilization A+
Capital Utilization B+
Operating Margins A
Relative Margins A+
Return on Equity B+
Quality of Revenues A-

Profitability Record Is Excellent Across the Board Suggesting a Very Well Managed Operation
T. Rowe Price Group has a strong 12-month trailing profitability record based on solid returns on shareholder equity, operating margins that exceed its peer group average and a remarkable net profit margin. The $1.20 billion net profit earned by the company in the last four quarters was equivalent to 28.34% of total sales. Operating income during that same period accounted for 45.73% of sales, 12.76% higher than the average operating margin for the Investment Managers industry, which was 31.66%. T. Rowe Price Group's return on equity--an important measure used by MarketGrader to gauge management efficiency--is very strong, at 25.24% based on how much the company has earned in the last year. This represents an improvement from the year-earlier 22.53% return on equity, a very healthy sign of profitable growth.
     Given such strong returns the company's capital structure seems to conservative, especially assuming it could raise debt capital to invest into what is a steady and profitable business. T. Rowe Price Group has no debt at all. T. Rowe Price Group's core earnings in the last twelve months grew moderately from the twelve months ended a year earlier. The company's EBITDA for the most recent period was $2.13 billion, or 0.88% above the $2.11 billion earned from its core operations in the prior period. EBITDA is used by MarketGrader to measure the company's true earnings power since it includes interest expenses, income taxes, depreciation and amortization, all non-operating expenses, which are nevertheless accounted for in other parts of our analysis that look at EPS gains and net income.

 

Cash Flow Growth A+
EBIDTA Margin A+
Debt/Cash Flow Ratio A+
Interest Cov. Capacity A+
Economic Value A+
Retention Rate A-

Outstanding Cash Flow Indicators Show the Company Is Managed Smartly and in the Best Interest of its Shareholders
T. Rowe Price Group's cash flow grew considerably in its latest quarter to $140.00 million, a 86.17% increase from $75.20 million reported in the year earlier period. This growth seems to be accelerating considering that in the last twelve months the company's cash flow was 10.14% higher than the twelve months ended a year ago, a nice increase but quite lower than the current pace. This upward trend should boost its margins and overall profitability in the next few quarters. Even though the company's balance sheet remains debt-free, as was the case a year ago, over that same period its cash on hand fell by 22.16%, from $1.51 billion to $1.17 billion, something worth watching when it next reports financial results.
     Our Economic Value indicator measures the company's ability to generate a true economic profit by taking into account not only the costs of running the business but also the cost of capital. In T. Rowe Price Group's case, since the company has no debt, we only look at the cost of equity, which is to say the opportunity cost to an investor of having his capital tied up in the company's shares instead of some other investment. Based on its 12-month trailing operating income, T. Rowe Price Group generated a 40.72% return on $4.76 billion of invested capital. Since it has no debt this simply includes all forms of equity. Its after tax cost of equity during the last year was 9.28%, which, when deducted from its return on investment results in an economic value added, or EVA, of 31.44%. This is a remarkable return to its shareholders, more than justifying their investment in T. Rowe Price Group's shares. The company announced on March 31, 2015 that it was cutting its quarterly common dividend 79.37% to 52.00 cents a share from 2.52 cents. T. Rowe Price Group has been paying a dividend to its common shareholders for at least 30 years. Including the latest payout, the stock is currently yielding 3.18%. T. Rowe Price Group spent $1.06 billion in common dividend payments in the last 12 months, which account for 69.60% of the company's cash flow and 88.12% of its after-tax earnings, an extremely large payout level. This represents an increase from the 85.75% of earnings paid out in the 12 months ended just a quarter earlier. While the company's fundamentals are generally positive, the increase in the payout to such high levels threatens to erode the firm's liquidity and strain its balance sheet.

 

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