Description

TROW is a very good business trading at a reasonable price.  The business offers a strong balance sheet, high cash flow, solid dividend yield and consistent buyback plan, well-regarded products and management, and very reasonable relative valuation but the downside is the company is closely tied to the future fate of U.S. domestic markets.

Business

TROW is an asset manager - AUM is 1086b, with 856b in equity/blend assets and 230b in fixed income and money market.  Target date funds currently make up 253b of assets.  Biggest active funds include BlueChipGrowth (5 stars; 0.7% expense ratio; beats sp500 over 1, 3, 5, and 10 years), Growth Stock (4 stars; 0.67% expense ratio; beats sp500 over 1, 3, 5, and 10 years), Mid Cap Growth (5 stars; .76% expense ratio; beats category average over 3, 5, and 10 years), Capital Appreciation (5 stars; .71% expense ratio, beats sp500 over 1,3,5, and 10 years), and New Income (3 stars, .54% expense ratio, beats or equals average fund in category over 3 and 5 years).

Here is why you should like the stock

*business generates significant cash flow - using Q2 x 4, net income is 1796 with appx 150m in DA or 1946 or 7.2% of the current market cap.  TTM CapEx is 182m

*company distributions of dividend/buybacks - TTM dividend is 631m with 2016-17-18-ytd buybacks of 988-677-488-447.  Company pays the occasional special dividend (per VL, 1.00 in Q4-12 and $2.00 in Q2-15)

*strong rankings on product lines - as of Q2-2018, 86% of AUM in products rated 4 or 5 stars by Morningstar.  Over 3 and 5 years, 80% and 84% of fund outperformed Morn medians.  Over 10 years, 84% did.  

*offers total exposure to market styles and strategies - while growth strategies currently dominate the largest offerings, TROW offers many products for many strategies.  When growth stocks pivot (eventually? for a time?), there will be other quality options to take the transfers as they occur. 

*strong BS.  Cash and investments include 1484 cash, 2460 investments, and no debt.  

*solid flows - over 17b the past 12 months ending in June 2018 - see flow history below.   AUM is currently 4% higher than June 2018.   AUM is reported each month.  

*premier reputation - the company offers solid products priced very sharply vs most active alternatives and offers a wide variety of options, and the firm almost never appears in the news for contrary reasons.  As noted above, a considerable number of their offerings have beaten index alternatives.  Morn rates the management as 'Exemplary', and other than excessive use of options (recently curtailed) and abnormally high CapEx for an asset manager (relatively speaking) they've always been impressive and consistent 

Here is why you should not like the stock

*TROW is a bull market vehicle - in a downturn, the company suffers multiple ways:  lower or negative flows; lower AUM; lower investment values on the BS.  When we do get declines, TROW will far further and faster than the overall market, esp. in anything with a 20% drop which is long overdue

*trend to index products - there is a short writeup on TROW here on VIC which reflects a well-known view of active to passive product transfer which at the very least pressures the multiples on these types of stocks which is evident when you look at the group.  Understanding this risk, I believe that solid performance which is likely to continue (relatively speaking) and reasonable cost help combat this issue, and indexing won't always work.  Plus, because TROW publishes inflow data, it is easy to identify sea changes in action.

*restricted stock - TROW no longer issues options but RSUs continue to fight buybacks in the share count (details in the 10k)

The 52 week high/low is 127.43 to 82.82 - these roughly correspond to flow history (small period of outflows in 2016) though the stock is down recently on no news I can find other than a brokerage downgrade (which I haven't seen).  I don't love this stock - I'm very low on ideas right now and TROW - like DHIL - stands out in the areas I cover, but I do own this as a stock in a diversified portfolio, and I tend to trade it back and forth on 10 to 20% increments.  This bull market has gone on longer than most would have believed, and TROW is the sort of business I have held a core position for almost forever, but I am severely limited in my universe and it is really tough to find ideas to post (my membership lapsed before for a similar reason).   For what they do, they are an exceptional firm, but coming up with even 2 excellent ideas right now has been really, really hard for me, esp. over a 12 month period.  In my experience, great ideas come in bunches with dryness in between.

Flow History

Catalyst

in a bull market, a natural movement back to top of price range