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Equity Analyst specialized in financial services equities.
  • TROW - post 3Q earnings could see more downward pressure 1 comment
    Oct 26, 2011 8:09 AM | about stocks: TROW, BLK, BEN, WDR, JNS, AB, LM, AMG, OZM
    T. Rowe Price's 3Q-11 earnings ended up missing the street as noted on SA. It looks as though some meaningful EPS downgrades could come due. The current consensus 2012e of $3.12 could come under further pressure as several factors trickle through:
    (i) Lower AUM in 3Q-11, especially in equities products. Post the 3Q carnage, the firm's ending AUM of $453.5B were -9.5% below their average level during 3Q-11, and down 5.9% from the starting level of 2011. This dynamic creates some earnings comp headwinds going forward that are significant; a strong and sustained equity market bounce would be the counterbalance needed to fix this.
    (ii) The sustainabliity of TROW's net flows advantage may be called into question after 3Q reported outflows of -$2.6B (first quarter of outflows since 2008). This issue plays into the P/E multiple expansion versus compression dynamic, which in the case of TROW looks like the risk/reward is skewed towards potential compression since the stock trades at a premium to its peers ($51 share price is 16.3x the 2012e consensus EPS for TROW versus peers trading on 11x-12x range). This article in Barron's notes the street's concern about the stock's premium rating blogs.barrons.com/focusonfunds/2011/10/25/trow-not-immune-from-deteriorating-macro-conditions-in-q3/ 

    Where could TROW go from here based on multiple compression and earnings downgrades?
    Step-1 - Earnings downgrade potential on 2012e consensus: The current 3.12 EPS figure looks like it's about 10% higher than the annualized 3Q-11 EPS (0.71ps). Assuming that downgrades get 2012e closer to a 6% annualized uplit then you are looking at $3.00 per share.
    Step-2 - Applying a lower P/E multiple than the current 16.3x Assuming that TROW's P/E premium compresses relative to the asset manager peer group by reaching a 14x-15x multiple, then the shares could slide towards a $42-$45 range. This zone could become a support zone for TROW as the shares would be yielding closer to 3% (based on $1.24ps annualized DPS) and would be near the lows reached in Q3-11. In the event of significant stock market weakness, then P/E compression towards 12x-14x (more volatility) could also be seen.

    On the upside, it looks as though multiple expansion for TROW would require a significant stock market rally, and even then investors and traders might look to take a "wait and see" attitude towards TROW until it next reports earnings and fund inflows (Q4-11 earnings will be due in January 2012).




    Themes: Asset Managers, Financials Stocks: TROW, BLK, BEN, WDR, JNS, AB, LM, AMG, OZM
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  • FinancialsFred
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    Comments (9) | Send Message
     
    Author’s reply » With Eurozone news sparking a mega market rip, the 20x-21x P/E range on a $3.00-$3.10 EPS for 2012e could see TROW shares capped by the $61-65 range from May-June 2011.

     

    If the P/E premium to peers compresses, then other stocks such as BLK, AB, LM, JNS, IVZ could crank out more upside than TROW in a sustained market rally environment.

     

    This is based on using the 2012e S&P 500 EPS of c.$100 per share and assuming that in a bull market scenario the P/E could go to 14x-15x (1400-1500 range on S&P).
    27 Oct 2011, 04:04 PM Reply Like
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