20150312TROW介紹

Even with more volatile equity markets, T. Rowe Price will generate solid organic growth this year.

byGreggory Warren, CFA

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Analyst Note

Outflows Detract From T. Rowe Price's Solid Fourth-Quarter and Full-Year Results; No Change to FVE 
by Greggory Warren, CFA, 01/28/2015

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Analyst Note 01/28/2015 

Even though wide-moat  T. Rowe Price posted another period of outflows during the fourth quarter, it does not affect our long-term outlook for the firm. Our $89 per share fair value estimate remains in place. The company closed out 2014 with a record $746.8 billion in assets under management, a 2% increase sequentially and an 8% increase year over year. Fourth-quarter revenue increased 10% compared with the prior year's period and was up 14% for the full year. We expect AUM and revenue growth to be in the mid- to high single digits during 2015. As for profitability, T. Rowe Price closed out the year with operating margins north of 47%. We expect the firm to continue to gradually improve its profitability as the size and scale of its operations expand. With the shares trading down on Jan. 28 on news of the net outflows, T. Rowe Price is starting to look attractive for long-term investors (trading at 90% of our fair value estimate and 16.3 times the consensus estimate for 2015).

Net outflows of $5.1 billion during the fourth quarter marked only the sixth quarter since the 2008-09 financial crisis that T. Rowe Price has reported outflows. Most of those periods were affected by redemptions from the company's "other investment portfolios" segment, which includes separately managed accounts, subadvised funds, and other sponsored investment portfolios. This is a smaller piece of the business overall, and most of the decisions to pull capital have been driven by changes in investment mandates as opposed to performance-related issues. Net outflows of $1.3 billion from T. Rowe Price's mutual fund operations, on the other hand, were not out of the ordinary, as the industry itself had a difficult time holding on to assets during the period (especially in active equities). Investment performance continues to be solid, with 73%, 74%, 80%, and 82% of the company's mutual funds outperforming their peers on a one-, three, five, and 10-year basis, respectively.

Investment Thesis 12/03/2014 

T. Rowe Price has produced impressive AUM and revenue growth over the last two decades thanks to its strong brand, solid fund performance, and mostly favorable market conditions. Although that track record of strong organic growth has been challenged of late as strategic reallocations by certain institutional and intermediary clients left the firm in net redemption over the past four calendar quarters, we don't think it will have a lasting impact on the firm's ability to generate flows. With around 57% of its AUM held in retirement accounts and variable-annuity investment portfolios, the firm has a far stickier set of assets than its peers, and benefits from a nearly constant flow of capital into these funds. Despite the increased volatility in the equity and credit markets in the back half of 2014, we continue to believe that T. Rowe Price will generate positive organic AUM growth during 2014. And with improved realization rates (as product mix shifts more toward equities), we see the firm generating 15% revenue growth this year.

We continue to believe that the bulk of T. Rowe Price's long-term organic growth will come from its target-date retirement fund platform, which over the last five years has grown from $43.7 billion in total AUM to $142.4 billion. Organic growth for these funds, which offer investors a way to invest for retirement that is based on their expected retirement date (and which automatically adjusts the asset mix as time passes), has averaged around 3% on a quarterly basis the last few years, and is expected to average around 2% quarterly as we move forward. This is on par with some of the best organic growth stories in our universe, with only the growth of ETFs being stronger right now. We expect the growth of these products to continue to contribute to solid increases in revenue and profitability for T. Rowe Price, with the firm's free cash flow expanding from just over $1.1 billion last year to more than $1.7 billion by the end of our five-year forecast.

Economic Moat 12/03/2014 

The publicly traded asset managers tend to have economic moats, with switching costs and intangible assets being the most durable sources of competitive advantage for firms in the asset-management industry. Although the switching costs might not be explicitly large, the benefits of switching from one asset manager to another are at times so uncertain that many investors take the path of least resistance and stay where they are. As a result, money that flows into asset-management firms tends to stay there--borne out by an average annual redemption rate for long-term mutual funds of around 30% during the last five-, 10-, 15-, 20-, and 25-year time frames. We believe asset managers can improve on the switching cost advantage inherent in the business with structural attributes (such as product mix, distribution channel concentration, and geographic reach) and intangible assets (such as strong brands and entrenched sales relationships), which provide them with a level of differentiation.

Although the barriers to entry are not significant for the industry, it takes time and skill to gather the level of assets necessary to build scale. This provides large, established asset managers with an advantage over smaller players, especially when it comes to gaining cost-effective access to distribution platforms. Asset stickiness (the degree to which assets remain with a manager over time) tends to be a bigger distinguisher between wide- and narrow-moat firms, in our view. Companies that have shown an ability to gather and retain investor assets during different market cycles have tended to produce more stable levels of profitability, with returns exceeding their cost of capital for longer periods. While more broadly diversified asset managers are structurally set up to hold on to assets regardless of market conditions, it has been firms with both solid product sets across asset classes and singular corporate cultures dedicated to a common purpose that have tended to thrive. Asset managers offering niche products with significantly higher switching costs--such as retirement accounts, funds with lock-up periods, and tax-managed strategies--have also been able to hold on to assets longer.

T. Rowe Price, in our view, has a wide economic moat around its operations. The company remains one of the better-positioned asset managers in our coverage universe, with high customer switching costs, a well-respected brand, and ample size and scale being the cornerstones of its wide economic moat. While its product mix is not overly diverse, with three quarters of total AUM dedicated to equity and balanced strategies, the company derives a significant portion (approximately 57%) of its managed assets from retirement accounts and variable-annuity portfolios. With the switching costs for these types of accounts being significantly higher than those for most other accounts, T. Rowe Price has a much stickier set of assets than many of its peers. Benefiting from a steady stream in investor inflows, the firm has recorded net long-term outflows in only six calendar quarters--the fourth quarter of 2008, the third quarter of 2011, the fourth quarter of 2012, and the second, third and fourth quarters of 2013--during the past decade.

This has allowed T. Rowe Price to generate more stable revenue, profitability, and cash flows than its peers and provides the company with more than enough capital to continue building on the competitive advantages that it already possesses. The firm's higher fee rates (given its heavier concentration in equity and blended strategies) have allowed it to generate operating margins in excess of 45% the last few years (the highest among the asset managers we cover), with free cash flow exceeding $1.1 billion last year. Given the strength of its product portfolio, which includes solid-performing funds across both its equity and fixed-income platforms, its ability to generate some of the strongest organic growth in our coverage universe, and the firm's knack for holding on to assets better than its peers, we think T. Rowe Price has a fairly wide moat around its operations.

Valuation 12/03/2014 

We've increased our fair value estimate for T. Rowe Price to $89 per share from $87 to reflect changes in our assumptions about the firm's AUM, revenue, and profitability since our last update. This new fair value estimate implies a P/E multiple of 18.0 times our 2015 earnings estimate and 16.5 times our 2016 earnings estimate. T. Rowe Price has historically garnered a higher multiple than the rest of the asset managers, as its business model has tended to generate more consistent inflows and much stickier assets than its peers. We use a 10% cost of equity in our valuation. T. Rowe Price entered the fourth quarter of 2014 with $731.2 billion in managed assets. While we had expected weakness in equity and currency markets to keep the firm's AUM from expanding much from these levels, things have rebounded since the middle of October, and the firm looks set now to close out the year with around $750 billion in assets. This would put results at the upper end of our forecast range of $725 billion to $750 billion in total AUM, leave average AUM up 15% year over year, and allow the firm to generate 15% revenue growth for all of 2014. Our full-year projection assumes a 1.5% annual organic growth rate for long-term assets, though, due to ongoing outflows from T. Rowe Price's "other investment portfolios" segment, which includes separately managed accounts, subadvised funds, and other sponsored investment portfolios. While revenue growth is likely to be somewhat weaker next year, we continue to believe that more modest levels of AUM growth will translate into 7% average annual top-line growth during the final years of our five-year projection period. The net result is an 8.5% CAGR for revenue during 2013-18 (compared with 7.9% previously). As for the company's profitability, operating margins of 47.7% through the first nine months of the year represent an 80 basis point improvement over 2013 and leave the firm well-positioned to close out the year within our targeted range of 47%-48%. Our long-term forecast continues to call for operating margins of 49%-50% of revenue by the end of 2018.

Risk 12/03/2014 

With more than 80% of annual revenue derived from management fees levied on AUM, dramatic market movements or changes in fund flows can have a significant impact on operating income and cash flows. T. Rowe Price's investment offerings are overwhelmingly tied to U.S. equity markets, with three fourths of its AUM invested in equity and balanced strategies. Additionally, six T. Rowe Price funds--Growth Stock (PRGFX), Equity Income (PRFDX), Mid-Cap Growth (RPMGX), Blue-Chip Growth (TRBCX), Value (TRVLX), and Capital Appreciation (PRWCX)--accounted for 22% of the firm's AUM at the end of last year and 25% of its investment advisory revenue during 2013. As T. Rowe Price increases its investment in overseas asset managers, especially in emerging and developing economies like China and India, the firm is exposing itself to myriad cultural, economic, political, and currency risks that exist in the markets these managers serve.

Management 10/23/2014 

T. Rowe Price is unique among the asset managers we cover in that it has traditionally been run by a group of top officers (the management committee) who consult one another before making major decisions. Current president and CEO James Kennedy started working for T. Rowe Price in 1978 and served as director of equity research (1987-99) and director of the equity division (1997-2006) before taking the role of chief executive. Chairman Brian Rogers ascended to his role at the same time that Kennedy became president and CEO, and continues to serve as chief investment officer, a role he has held since 2004. Other members of the management committee are Edward Bernard, vice chairman of the board of directors; William Stromberg, head of global equities and global equity research; Michael Gitlin, global head of the fixed-income division; Christopher Alderson, head of international equities; and John Linehan, head of U.S. equities.

The management committee, which is responsible for guiding, implementing, and reviewing major policy and operating initiatives, has, in our view, done an exemplary job over the years. Capital allocation has been prudent, with the company carrying little to no debt on its books, engaging in very little acquisition activity, and tending to return cash to shareholders in the form of share repurchases and dividends. In the asset-management industry, debt can be a net negative, as was seen during the 2008-09 financial crisis when several firms that were carrying larger levels of debt had to scramble to raise capital (including issuing additional equity) after seeing revenue and profitability drop dramatically in response to the market decline. Compensation has tended to be reasonable, with executive pay being in line with most of the larger asset managers we cover. The one issue we do have is that T. Rowe Price has been a heavy user of stock options, which not only dilute existing shareholders but also blunt the impact of its share-repurchase programs.

As part of its ongoing effort to enhance the firm's competitive positioning, the management committee has been focused on building additional scale through new investment products, like its target-date retirement funds, and expanding the reach of its investment advisory business by further penetrating domestic distribution channels and moving into non-U.S. markets (especially in emerging and developing economies, where T. Rowe Price aims to garner first-mover advantage over some of its larger peers). Many of these efforts have paid off handsomely, as T. Rowe Price has seen investor outflows from its long-term AUM in just six calendar quarters during the past decade. More important, the firm has generated average quarterly inflows of $3.5 billion since the start of 2009, being one of only a handful of asset managers that have been able to generate equity inflows since the financial crisis, driven primarily by the stronger relative performance of its funds and the effectiveness of its sales efforts. 

Target-date retirement portfolios remain the largest driver of growth for T. Rowe Price. During the last five years, the firm has pulled in $54.0 billion in managed assets with its target-date retirement portfolios, which at $142.4 billion in total assets at the end of the third quarter of 2014 accounted for 19% of T. Rowe Price's total AUM. The company has also made headway in the advisor channel, picking up business with more and more advisors that are using fee-based models to service their clients. And while it has been affected by outflows from institutional investors and third-party financial intermediaries during the past year or so, these accounts represent a relatively small portion of T. Rowe Price's total managed assets and we don't view their actions as being indicative of a broader trend in the company's portfolio. That said, it does represent a mild setback for the firm, which had viewed these two distributional channels, which can be as sticky as the retirement channel it already serves, as meaningful areas of growth.

Overview 

Profile: 

T. Rowe Price provides asset management services for individual and institutional investors. It offers a broad range of no-load U.S. and international stock, blended asset, bond, and money market funds. Approximately 57% of the firm's managed assets are held in retirement accounts and variable-annuity investment portfolios. T. Rowe Price also manages private accounts, provides retirement planning advice, and offers discount brokerage and trust services. The company had $731.2 billion in total AUM at the end of the third quarter of 2014.