Bailey Pemberton
4 min read
T. Rowe Price Group has had a rough long haul, with the share price down 37.9% over five years, so the obvious question is whether the returns it earns on its capital still support where the stock trades today. With new products and business initiatives now in play, investors are weighing how much of that effort is already reflected in the current valuation.
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A fall of 37.9% over the past five years puts the spotlight on whether T. Rowe Price is now priced in line with the returns its investment platform can consistently generate on shareholder capital.
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The recent expansion of its wealth advisor engagement and ETF lineup may support different expectations for fee mix, capital requirements, and ultimately the profitability of the capital T. Rowe Price puts to work in its business.
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Prefer to judge T. Rowe Price Group on earnings? See what T. Rowe Price Group’s 10.0x P/E says about the price.
The issue now is whether the returns T. Rowe Price earns on its capital are strong and durable enough to justify the price investors are currently paying for the stock.
If you are questioning whether T. Rowe Price Group’s recent 37.9% share price decline over five years lines up with the returns it earns on capital, it can help to compare that same Fair Ratio lens across 33 high quality undervalued stocks
Does T. Rowe Price Group Look Undervalued on Excess Returns?
The Excess Returns model looks at how much profit T. Rowe Price Group can generate on each dollar of shareholder equity above its own funding cost. For T. Rowe Price, the inputs show a book value of $51.58 per share and a stable earnings figure of $9.93 per share, with that earnings figure based on weighted future Return on Equity estimates from 5 analysts.
What stands out is the spread between the estimated cost of equity of $4.19 per share and the forecast excess return of $5.74 per share. That relationship lines up with an average Return on Equity of 18.67% on a stable book value of $53.19 per share. In this framework, the business model is expected to keep generating returns above its capital charge. Because the current share price is $101.37, the Excess Returns projections put T. Rowe Price Group’s estimated intrinsic value substantially above the current share price. The expansion of its U.S. wealth advisor engagement and ETF lineup helps explain why the Excess Returns model still sees value in those projected cash flows, even though the market has marked the share price down over recent years. Find out what T. Rowe Price Group could be worth using our Excess Returns estimate.
