On July 28, 2023, T. Rowe Price Group Inc (TROW, Financial) saw a significant daily gain of 10.23%, with an Earnings Per Share (EPS) of 6.11. The question that arises is: Is the stock modestly undervalued? This article explores this question by providing a comprehensive valuation analysis. If you are a value investor seeking informed financial decisions, we invite you to read on.
Understanding T. Rowe Price Group
T. Rowe Price Group Inc (TROW, Financial) is a leading asset-management service provider catering to individual and institutional investors. Offering a broad range of no-load U.S. and international stock, hybrid, bond, and money market funds, the company had $1.314 trillion in managed assets as of February 2023. Two-thirds of these assets are held in retirement-based accounts, providing T. Rowe Price Group with a somewhat stickier client base than most of its peers. The company also manages private accounts, provides retirement planning advice, and offers discount brokerage and trust services. Despite being primarily U.S.-based, it derives just under 10% of its Assets Under Management (AUM) from overseas.
As of the date, T. Rowe Price Group's stock price stands at $129.1, with a market cap of $29 billion. However, the GF Value, an estimate of fair value, is $144.97, suggesting that the stock is modestly undervalued.
GF Value: A Closer Look
The GF Value is a proprietary measure of a stock's intrinsic value, computed considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
According to GuruFocus Value calculation, the stock of T. Rowe Price Group (TROW, Financial) is estimated to be modestly undervalued. This suggests that the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength of T. Rowe Price Group
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. T. Rowe Price Group has a cash-to-debt ratio of 6.47, which is worse than 52.3% of companies in the Asset Management industry. Despite this, GuruFocus ranks the overall financial strength of T. Rowe Price Group at 8 out of 10, indicating strong financial health.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, typically poses less risk. T. Rowe Price Group has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $6.2 billion and Earnings Per Share (EPS) of $6.11. Its operating margin is 33.74%, which ranks better than 71.93% of companies in the Asset Management industry. Overall, GuruFocus ranks the profitability of T. Rowe Price Group at 10 out of 10, indicating strong profitability.
Growth is a crucial factor in the valuation of a company. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of T. Rowe Price Group is 6.7%, which ranks better than 54.65% of companies in the Asset Management industry. However, the 3-year average EBITDA growth rate is 8.6%, ranking worse than 52.89% of companies in the same industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital (ROIC) to the weighted average cost of capital (WACC). When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, T. Rowe Price Group's ROIC is 16.06, and its cost of capital is 12.32.
Conclusion
Overall, T. Rowe Price Group (TROW, Financial) stock is estimated to be modestly undervalued. The company's financial condition is strong, and its profitability is robust. However, its growth ranks worse than 52.89% of companies in the Asset Management industry. To learn more about T. Rowe Price Group stock, you can check out its 30-Year Financials here.
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