TROW Stock Study (7-20-23)

Posted by Mark on September 25, 2023 at 07:02 | Last modified: July 20, 2023 14:07

I recently did a stock study on T. Rowe Price Group Inc. (TROW) with a closing price of $121.27.

M* writes:

     > 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, hybrid, bond, and money market funds…
     > Approximately two thirds of the company’s managed assets are held in
     > retirement-based accounts, which provides T. Rowe Price with a
     > somewhat stickier client base than most of its peers. The firm also
     > manages private accounts, provides retirement planning advice, and
     > offers discount brokerage and trust services.

Over the past decade, this medium-size company has grown sales and EPS 8.3% and 11.6% per year, respectively. Lines are up, straight, and parallel until 2022 when both decline [significantly]. PTPM is above industry averages and mostly above peer averages in ranging from 44.4% to 52.3% before dropping to 30.0% in ’22 for a last-5-year mean of 46.2%.

Also over the past decade, ROE has been higher than peer and industry averages by trending up from 22.5% in ’13 to 36.4% in ’21 before falling to 16.9% in ’22 for a last-5-year mean of 28.4%. Debt-to-Capital is much lower than peer and industry averages since the company has no debt on its books.

Quick Ratio is an eye-popping 5.5. Value Line rates the company A+ for Financial Strength while M* gives an “Exemplary” rating for Capital Allocation and a “Wide” Economic Moat classification.

With regard to sales growth:

• CNN Business projects contraction of 1.5% YOY and 1.5% growth per year for ’23 and ’22-’24 (based on 12 analysts).
• YF projects YOY 18.6% contraction and 25.3% growth for ’23 and ’24, respectively (4 analysts).
• Zacks projects YOY 2.1% contraction and 4.4% growth for ’23 and ’24, respectively (5).
• Value Line projects 6.8% annualized growth from ’22-’27.
• M* offers a 2-year ACE of 0.4% per year while projecting 2.3% per year x5 years in its analyst note.

I am forecasting below both long-term estimates at 2.0% per year.

With regard to EPS growth:

• CNN Business projects contraction of 13.7% YOY and 5.9% per year for ’23 and ’22-’24, respectively (based on 12 analysts), along with 5-year annualized contraction of 3.2%.
• MarketWatch projects annualized contraction of 5.7% and 0.9% for ’22-’24 and ’22-’25, respectively (14 analysts).
• Nasdaq.com projects growth of 3.1% YOY and 3.8% per year for ’24 and ’23-’25 (7 and 3 analysts for ’23/’24 and ’25).
• Seeking Alpha projects 4-year annualized contraction of 1.4%.
• YF projects YOY 14.0% contraction and 3.0% growth for ’23 and ’24, respectively (11), along with 5-year annualized contraction of 7.2%.
• Zacks projects YOY 15.3% contraction and 3.1% growth for ’23 and ’24, respectively (7), along with 5-year annualized growth of 6.0%.
• Value Line projects 10.9% annualized growth from ’22-’27.
• CFRA projects contraction of 14.0% YOY and 5.3% per year for ’23 and ’22-’24, respectively.
• M* projects long-term growth of 0.6%.

I am forecasting -1.0% per year, which is below the six-estimate long-term mean (+1.0%) of three positives and three negatives. I will use 2023 Q1 EPS of $6.11/share (annualized) as the initial value rather than ’22 EPS of $6.70.

My Forecast High P/E is 23.0. Over the past decade, high P/E trends down from 21.5 in ’13 to 17.1 in ’21 before spiking to 29.7 in ’22 [E down, P/E up] for a last-5-year mean of 18.9. The last-5-year-mean average P/E is 14.9. I would like to go below the entire range at 14.0, but that results in an invalid study. Out of necessity, I am forecasting higher.

My Forecast Low P/E is 7.0. Over the past decade, low P/E has ranged from 8.3 in ’20 to 17.0 in ’13 while mostly trending lower (until the EPS dive in ’22). The last-5-year mean is 11.0. I am forecasting below the entire range.

My Low Stock Price Forecast (LSPF) of $33.30 is the default based on $4.75/share initial value. I would typically assume zero growth by using the previous year as low EPS, but forecasting contraction for high EPS is worse than zero growth. Looking at the graph, I am [arbitrarily] selecting ’16 as low EPS since the earnings explosion begins the following year (’17).

My LSPF is 72.5% less than the previous close and 64.4% less than the 52-week low. This is more extreme than I have ever had for a LSPF but it seems necessary to maintain validity of the other inputs.

Over the past decade, Payout Ratio ranges from 32.9% in ’21 to 71.6% (upside outlier in ’22). The last-5-year mean (excluding ’22) is 35.6%. I am forecasting below the entire range at 32.0%.

These inputs land TROW in the SELL zone with a U/D ratio of 0.1. Total Annualized Return (TAR) is 3.5%.

PAR (using Forecast Average—not High—P/E) of -4.0% screams “I WOULDN’T TOUCH THAT WITH A 10-FOOT POLE!” Never before have I seen PAR negative. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead but even that has a long way to go before I’d consider investment since it is less than the current yield on T-bills.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 214 studies over the past 90 days (my study and 80 outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 6.0%, 7.7%, 17.7, 11.0, and 41.1%, respectively. Only my Forecast High P/E is higher (out of necessity). Value Line projects a future average annual P/E of 16.0: higher than MS (14.4) and mine (15.0).

MS high/low EPS is $9.78/$6.11 vs. my $5.81/$4.75 (per share). I am lower on growth rates and much lower on EPS range.

MS LSPF of $77.80 implies a Forecast Low P/E of 12.7 vs. the above-stated 11.0. MS LSPF is 15.8% greater than the default value of $6.11/share * 11.0 = $67.21, which results in more aggressive zoning. MS LSPF is also 134% greater than mine.

PEG ratio and Relative Value [(current P/E) / 5-year-mean average P/E] are two metrics I have started to monitor. PEG is 2.97 per Zacks 6.0% EPS growth rate while Relative Value is 1.33 per M*. Both suggest the stock to be overvalued.

As mentioned above, my LSPF seems unreasonably low. Perhaps this is what happens when long-term growth rates go negative. In my short history doing these stock studies, what I usually see after precipitous EPS declines are long-term earnings projections roughly equal to or greater than historical [as if to catch back up to trendline]. Such is not the case here, which may be indicative of a broken company rather than the higher-quality stock we aim to find.

I would look to re-evaluate TROW under $58/share.

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