T. Rowe Price: Not So Attractive Anymore

Summary

• Asset manager T. Rowe Price Group, Inc. underperformed in its recent Q3 card, but the market has likely anticipated a weak earnings release.
• As such, T. Rowe Price Group still managed to bottom in October (pre-earnings) and even surge to its August highs recently, outperforming the S&P 500 significantly.
• We discuss why analysts' projections likely reflect significant pessimism in the asset management industry.
• However, T. Rowe needs to execute well to justify a further re-rating as its relative valuation to its peers' median has widened.
• Revising from Buy to Hold for now, as we believe T. Rowe Price Group's near-term upside has been reflected.
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Thesis

Asset manager T. Rowe Price Group, Inc. (NASDAQ:TROW) saw its stock price surge recently with the release of its recent assets under management ("AUM") metrics. Accordingly, T. Rowe posted an October AUM of $1.28T, above its Q3 ending AUM of $1.23T.

We highlighted in our previous article that TROW looked attractive, even though it fell further to form its October lows. However, with the surge, TROW has outperformed the S&P 500 (SPX, SP500) since our last article, notching a gain of nearly 13% relative to the SPX's 2.5% uptick.

Its recent gains are also above TROW's 10Y total return CAGR of 10.4%, even though its YTD total return still posted a loss of nearly 36%.

We noted that T. Rowe's forward estimates were revised downward from our previous update after the company posted a weaker-than-expected Q3 release. In addition, our analysis of the S&P 500's asset management industry suggests that analysts have turned increasingly pessimistic through October.

Therefore, we postulate that significant risks in the industry have been reflected, which could spur a subsequent re-rating as investors anticipate the industry to reverse from its bear market malaise.

However, with the significant spike in TROW towards its critical resistance zone, we believe that buyers' caution is appropriate, as a pullback looks imminent.

Revising from Buy to Hold for now.

TROW: Q3 Underperformed Already Bearish Estimates

The consensus rating on TROW was downgraded from Hold to Sell as T. Rowe headed into its Q3 earnings release last month.

Therefore, it should have set up a lower bar for T. Rowe to clear as analysts penciled in their bear case assumptions. Yet, T. Rowe still underperformed the previous consensus estimates markedly, as it felt the impact of the market volatility in Q3 affecting its earnings power significantly.

T. Rowe Ending AUM (Company filings)

T. Rowe's AUM has continued to fall substantially through FQ3, registering a YoY decline of 23.7%. However, given the market volatility in Q3, we don't think investors should have been surprised by the downtrend.

Furthermore, TROW's price action suggested that the market likely anticipated a weak release, as it battered TROW into its recent October lows (pre-earnings).

Despite that, the asset manager managed to underperform the Street's bearish consensus, as it notched an adjusted EPS of $1.86, down 43.1% YoY.

T. Rowe Revenue change % and Adjusted EPS change % consensus estimates (S&P Cap IQ)

Therefore, it led to analysts slashing their forward estimates on T. Rowe further into FY23, seeing a tepid recovery, despite the potential for slower rate hikes cadence by the Fed.

S&P 500 Asset management industry net earnings revisions % (Yardeni Research, Refinitiv)

Accordingly, the revised analysts' estimates indicate that T. Rowe is projected to post an adjusted EPS growth of -37.9% for FY22 and -8.9% for FY23. Both estimates are well below the industry's average of -14% (FY22) and 4.8% (NTM).

Hence, analysts expect T. Rowe to underperform its industry significantly despite having likely penciled in a highly pessimistic outlook through October.

As seen above, the industry's net earnings revisions have reached levels seen near the depths of significant industry downturns previously. Therefore, it forebodes well for TROW and its peers to be re-rated as the industry recovers from its current bear market headwinds.

Despite the recent hawkish commentary by some Fed officials, the market has priced in a 75% probability of a 50 bps hike at the upcoming December FOMC. Accordingly, we urge investors to pay attention to the Fed's updated "dot plot," highlighting the median expectations of the forward Fed Fund rates (FFR).

Given the recent hawkish commentary by some Fed officials, the market has lifted the FFR back to the 5% zone. Therefore, a lower-than-expected median terminal FFR could help stabilize market sentiments on the asset management industry moving ahead.

Notwithstanding, we postulate that the optimism (of a slower rate hike cadence) at the upcoming FOMC is likely reflected in TROW's current valuation.

Is TROW Stock A Buy, Sell, Or Hold?

TROW NTM normalized P/E valuation trend (koyfin)

Even though Street analysts slashed TROW's forward estimates after its Q3 card, it didn't prevent TROW from recovering remarkably in early November. As explained, we believe the market had anticipated a weak release, so it didn't surprise the market.

With the slashed estimates, TROW's NTM normalized P/E has surged to 17.8x, well above its 10Y mean of 15.7x. It has also been lifted above its peers' median of 12.8x and the asset management industry's forward P/E of 13x.

Therefore, it's incumbent for TROW management to execute accordingly, to deserve a re-rating even though we believe its challenges have already been priced in.

TROW price chart (weekly) (TradingView)

As seen above, TROW has surged to re-test its August highs but has been rejected resolutely.

Hence, we postulate that the momentum spike is likely facing digestion against its near-term resistance. Given TROW's execution risks and peers' relative valuation, we don't expect it to be re-rated much higher from these levels.

Investors who managed to pick its October lows can consider taking some exposure off these levels, as it has likely outperformed T. Rowe Price Group's 10Y CAGR based on our analysis.

Revising from Buy to Hold for now.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.