T. Rowe Price Group Inc. Quarterly Valuation – December 2014 $TROW

220px-T-Rowe-Price-logoBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – November 2014.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how T. Rowe Price Group (TROW) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): T. Rowe Price Group, Inc. is a financial services holding company, which provides global investment management services through its subsidiaries to individual and institutional investors in the sponsored T. Rowe Price mutual funds and other investment portfolios, including separately managed accounts, sub-advised funds, and other sponsored investment funds offered to investors outside the United States and through variable annuity life insurance plans in the United States. The Company derives revenue from investment advisory services provided by its subsidiaries, such as T. Rowe Price Associates, Inc. and T. Rowe Price International Ltd. Its revenues depend on the total value and composition of assets under its management. Its assets under management are accumulated from a client base across four distribution channels. Effective August 20, 2013, T Rowe Price Group Inc acquired an undisclosed interest in GrubHub Inc, a provider of online food delivery services.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $84.49
MG Value $121.42
MG Opinion Undervalued
Value Based on 3% Growth $54.47
Value Based on 0% Growth $31.93
Market Implied Growth Rate 7.00%
Net Current Asset Value (NCAV) $5.71
PEmg 22.49
Current Ratio 3.82
PB Ratio 4.32

Balance Sheet – September 2014

Current Assets $2,068,000,000
Current Liabilities $541,000,000
Total Debt $0
Total Assets $5,768,000,000
Intangible Assets $666,000,000
Total Liabilities $541,000,000
Outstanding Shares 267,400,000

Earnings Per Share

2014 (estimate) $4.46
2013 $3.90
2012 $3.36
2011 $2.92
2010 $2.53
2009 $1.65
2008 $1.82
2007 $2.40
2006 $1.90
2005 $1.58
2004 $1.26

Earnings Per Share – ModernGraham

2014 (estimate) $3.76
2013 $3.23
2012 $2.75
2011 $2.38
2010 $2.09
2009 $1.87

Dividend History


T.Rowe Price Group is suitable for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the high PEmg and PB ratios.  The Enterprising Investor, on the other hand, has no initial concerns.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.09 in 2010 to an estimated $3.76 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of 7% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.

Be sure to check out previous ModernGraham valuations of T.Rowe Price Group Inc. (TROW) for greater perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on T.Rowe Price Group Inc. (TROW)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in T.Rowe Price Group Inc. (TROW) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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