Poor Flows, Higher Expense Projections Weigh on T. Rowe

While there was little in wide-moat rated T. Rowe Price's TROW fourth-quarter results that would alter our long-term view of the firm, we are lowering our fair value estimate to $195 per share from $212 to account for adjustments to our near-term forecast (primarily related to organic AUM growth and expenses) based on commentary from management about near-term flows and an expected rise in costs following the closure of the Oak Hill Advisors deal. T. Rowe Price closed out 2021 with a record $1.688 trillion in managed assets, up 4.7% sequentially and 14.8% on a year-over-year basis. Absent the OHA acquisition, which closed at the end of December, the firm's AUM was up 1.8% sequentially and 11.6% year over year. Net outflows of $22.7 billion ($2.5 billion of which came from T. Rowe Price redeeming investments in its own mutual funds during the quarter to finance the cash portion of the OHA deal) were the worst we can ever remember seeing from the company. While average AUM was up 18.6% year over year during the fourth quarter, T. Rowe Price reported a 13.0% increase in net revenue when compared with the prior year's period due to product mix shift and target date fund fee reductions that took effect in the back half of the year. Full-year top-line growth of 23.6% was in line with our forecast calling for 23.4% revenue growth during 2021. As for profitability, full-year adjusted operating margins of 50.0% were 370 basis points higher than the year-ago period and in line with our projections. Management tried to get out in front of its expense issues this year (with expenses like marketing and distribution likely returning to more normal levels as the operating environment moves toward a post-COVID-19 world) by noting that the firm is likely to see expenses grow 12%-16% this year, which is inclusive of a full-years' worth of OHA's operating expenses. This led to a lower profitability contribution from OHA than we had forecast previously, impacting our valuation.

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