2023-04-06 10:47:53 ET
Summary
- Traditional active asset managers are struggling with shifts persisting toward passive and lower stock and bond markets compared to a year ago.
- With several consecutive months of net outflows, that trend may continue in March.
- With TROW not yet confirming its Q1 reporting date, there are bearish implications, and I outline key price levels to watch ahead of earnings.
Money has been shifting around across Wall Street and Main Street following the domestic regional banking crisis and international woes with Credit Suisse in March. It will make for an interesting earnings season that kicks off next week. Big picture, Financials trade cheaply, but not all stocks are created equal in the sector.
I notice that T. Rowe Price ( TROW ) endured sharp net outflows in January and February, and the thinking is that March will be the same story. I have a hold on TROW right now based on bearish fundamental and technical headwinds being offset by a fair valuation ahead of its unconfirmed Q1 earnings date.
Financials trade at the second-lowest P/E multiple and have the highest expected EPS growth
Goldman Sachs
According to Bank of America Global Research, T. Rowe Price is a global investment manager with over $1.5Tn in assets under management. The company has 7,000+ employees globally with a presence in 17 countries. TROW provides investment services to institutional investors, retirement plans, financial intermediaries, and retail clients through a range of investment products including US mutual funds, sub-advised funds, SMA, and CITs.
The Baltimore-based $24.6 billion market cap Capital Markets industry company within the Financial sector trades at a somewhat low 16.4 trailing 12-month GAAP price-to-earnings ratio and pays a high 4.5% dividend yield, according to The Wall Street Journal.
The firm was recently on the M&A hunt with an acquisition of Retiree, a fintech player, but that did little to help the stock rally from its trading range. The bigger problem is net outflows which have been the trend since late last year. The asset manager is also exposed to bearish trends from the so-called "wealth effect" that implies that lower net worths amount to wealthier investors reducing consumption (also that lower account values simply mean reduced AUM fees). Finally, back in January , TROW modestly beat on the bottom line while revenue came in near expectations.
On valuation , analysts at BofA recently took down 2023 EPS estimates from $6.55 to $$6.51 while reducing 2024 per-share operating profits from $6.76 to $6.25. The Bloomberg consensus forecasts are much more upbeat but likely don't reflect some bearish moves in the traditional asset manager industry lately.
Dividends, though, are still expected to inch toward $5 per share in the quarters ahead, but both the operating and GAAP P/Es are not overly cheap at just above 16, about a 10% premium to the firm's 5-year average, though the forward price-to-book ratio is at a 32% discount. Overall, with earnings headwinds this year, I think buying shares today is a bit premature. I see the stock near fair value considering its current earnings multiples and the P/B ratio.
TROW: Earnings Estimate Downgrade From BofA
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q1 2023 earnings date of Thursday, April 27 BMO. That is unusual because, according to WSH's data, T. Rowe has yet to confirm its Q1 reporting date.
In recent years, it typically confirms on March 1 with a standard deviation of 27.8 days. As of April 6, it is 36 days beyond that average confirmation date, producing an earnings date confirmation Z-score near 1.3. Data show that these outliers matter, and late confirmers tend to have bearish news when they finally issue results to the street.
Corporate Event Risk Calendar
The Options Angle
Digging into the upcoming earnings report, data from Option Research & Technology Services (ORATS) show a consensus EPS forecast of $1.63 which would be a massive 38% drop in per-share profits from the same quarter a year ago. Still, ORATS reports that there have been two analyst upgrades of the earnings since the January report. But the bears point to the firm missing on the bottom line in two of the last four reports. The stock has traded lower post-earnings in four of the last five reports (with the one move higher being very modest).
This time around, traders have priced in a small 4.3% earnings-related stock price move when analyzing the at-the-money straddle expiring soonest after the expected April 27 earnings release. I am inclined to buy puts at that price given the troubles in the industry following the March mini banking crisis.
TROW: Inexpensive Options Ahead of Earnings
The Technical Take
TROW remains in a steep drawdown off its 2021 peak. The stock is off about 50% and is confined to a trading range between $93 and $135. It is currently just below the midpoint of that zone. I see long-term support in the $80s, so buying shares on an approach to that level makes sense technically. Also, momentum should build on a rally above the Q4 2022 high.
With TROW solidly below its long-term 200-week moving average, the ball is in the bears' court. I would buy puts should we see a rise to the $120s ahead of earnings but going long the stock in the $90s is a favorable risk/reward.
TROW: Rangebound in the Last Year
The Bottom Line
I am a hold on TROW given its valuation and tough times in the industry right now. I would buy the stock should it fall into the $90s, but buying puts on a rally ahead of earnings could be a profitable near-term play given the unconfirmed earnings date.
For further details see:
T. Rowe Price: Bearish Unconfirmed Earnings Date, Fund Outflows May Persist