$8 Billion Money Manager Bets On 41% Upside

Deep down in the filings of an $8 billion money manager is a holding that has the potential to rise by as much as 41%.

William Jones isn’t a name familiar with many investors as Warren Buffett or Ray Dalio may be but the enormous assets under management demand a closer look as to what he’s picking and why.

Under the hood is a position in T. Rowe Price, and if he’s right the sky may be the limit for this under-appreciated financial firm. Here’s why.

Key Points

• T. Rowe Price’s investment advisory fees grew by 10.8% due to a 13.0% rise in AUM, with effective cost management despite a slight margin decline.
• Trading at a 12.3x P/E, T. Rowe Price increased share buybacks and dividends, signaling confidence and suggesting significant upside potential to $152 per share.
• Margin pressure from rising operating expenses, including compensation and technology costs, could threaten future profitability if not managed carefully.

Why T Rowe Price Could Soar

Investment advisory fees, which make up approximately 90% of T. Rowe Price’s net revenues, increased by 10.8% in the second quarter of 2024 thanks in large part to a 13.0% rise in average assets under management. As the market rallied, AUM rose and the net result was a pop in earnings too.

What’s notable is that, in spite of a slight decrease in operating margin to 32.6%, cost control measures were still effective given that non-GAAP operating expenses only increased by 7.8%, which is lower than the revenue growth rate.

It’s clear those on the inside see the 12.3x price-to-earnings ratio, the lowest in 5 years, as an opportunity because they repurchased 1.7 million shares during the first half of 2024, significantly up from 420,000 shares in the same period of 2023.

These share buybacks are set to benefit shareholders because they reduce the total number of outstanding shares, and so increase earnings per share figures.

Management also increased the dividend payout and the yield now stands at 4.73%, further suggesting confidence among those in-the-know.

Looking to the valuation, a discounted cash flow forecast puts fair value close to $152 per share suggesting material upside.

What to Watch?

While there is lots to like about T. Rowe Price now, eagle-eyed investors should pay attention to a few areas. For one, the operating margin decreased to 32.6% in the second quarter of 2024 from 33.1% in the same quarter of 2023.

The reasons for this are largely due to acquisition-related amortization and impairments and changes in the supplemental savings plan liability and poses a threat to margins over time even as revenues are growing.

So too operating expenses increased by 8.5% year-over-year, from $1 billion in the second quarter of 2023 to $1,168.6 million in the same quarter of 2024.

A significant portion of this increase was due to higher compensation and related benefits, as well as increased distribution and servicing costs, advertising, promotion expenses, and technology-related costs, all of which combined may threaten profitability.

Overall, there are enough reasons to be bullish about the prospects of T Rowe Price to see why William Jones was willing to deploy some of the massive $8 billion firepower to investing in the financial firm.