Organic Growth Aids T. Rowe Price (TROW), High Costs Ail
T. Rowe Price Group, Inc. TROW remains focused on fortifying its business by enhancing investment capabilities, broadening distribution reach and deepening client partnerships to support long-term growth. However, elevated operating expenses are likely to impede bottom-line growth for the company.
Also, analysts are optimistic regarding its earnings growth potential. The Zacks Consensus Estimate for TROW’s 2023 earnings has been revised 2.6% upward over the past 30 days.
Over the past three months, shares of TROW have edged down 0.6% compared with the industry’s 5.2% decline.
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The company currently carries a Zacks Rank #3 (Hold).
Markedly, organic growth remains a key strength at T. Rowe Price, as reflected by its revenue growth story. Net revenues saw a three-year (ended 2022) compound annual growth rate (CAGR) of 2.2%. The company’s efforts to strengthen distribution channels in different geographic regions and improve technology platforms will drive top-line growth.
T. Rowe Price has been able to sustain positive earnings throughout the critical period supported by its diverse business model. In December 2021, the company completed the acquisition of Oak Hill Advisors, L.P., thereby bulking up its offerings in the alternative investment market space. Going forward, the mix shift toward international growth funds is expected to help increase both revenues and the investment management margin of the company.
TROW’s substantial liquidity, which included total cash and investments of $4.08 billion as of Dec 31, 2022, enables capital deployment activities.
The company has hiked annual dividends for 37 consecutive years. Also, in 2022, 6.8 million shares were bought back by the firm for $855.3 million. As of 2022 end, it had the authorization to repurchase up to 8,775,217 common shares. Such efforts reflect the company’s commitment to return value to its shareholders with its strong cash generation capabilities.
However, elevated operating expenses are major concerns for T. Rowe Price, with costs escalating at a three-year (ended 2022) CAGR of 9%. The company incurs significant expenditures to attract new investment advisory clients and additional investments from existing clients. This may inflate expenses in the near term and hinder bottom-line expansion.
Investment advisory fees are the biggest revenue source for T. Rowe Price. The increased dependence on these can affect the company's financials in the near term, as changes in assets under management due to market fluctuations and foreign exchange translations, regulatory changes, or a sudden slowdown in overall business activities can hurt this revenue source.
Market-share losses due to the high adoption of passive investments via index funds and exchange traded funds are other concerns. The increasing preference for passive investing has affected the company's new client inflows. Although T. Rowe Price is making efforts to diversify its product mix across other asset classes and geographies, concentration in U.S. equities poses a major risk that can lead to inconsistent asset flows.
Stocks Worth a Look
A couple of better-ranked stocks from the finance space are Ameriprise Financial AMP and Ares Management ARES.
The Zacks Consensus Estimate for Ameriprise Financial’scurrent-year earnings has been unchanged over the past 30 days. Its shares have gained 17.4% in the past six months. Currently, AMP sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Ares Management currently carries a Zacks Rank #2 (Buy). Its earnings estimates for 2023 have been unchanged over the past 30 days. In the past six months, ARES shares have rallied 20.4%.
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