Outflows, Market Losses Have an Impact on T. Rowe Price
We expect to lower our fair value estimate.
While there was little in wide-moat T. Rowe Price's first-quarter results that would alter our long-term view of the firm, we expect to lower our fair value estimate to $175 per share from $195 to account for adjustments to our near-term forecast. T. Rowe Price closed out the March quarter with $1.552 trillion in managed assets, down 8.1% sequentially but up 2.2% on a year-over-year basis. Absent the acquisition of Oak Hill Advisors, which closed at the end of December 2021, the firm's AUM was down 0.6% year over year.
Net outflows of $5.3 billion, while disappointing, were significantly better than the $22.7 billion in outflows that the firm recorded in the December quarter. That said, with the S&P 500 Index suffering its worst quarterly loss since the start of the pandemic, and with the Bloomberg U.S. Aggregate Bond Index recording its steepest decline since late 1980, the firm reported market losses in all segments of its operations.
While average AUM was up 3.4% year over year during the March quarter, T. Rowe Price reported a 2.0% increase in net revenue when compared with the prior year's period due primarily to product mix shift. With the company facing another difficult quarter in the equity markets this quarter, we believe that top-line growth will drop into negative territory for the full year. This will likely take our forecast average annual revenue growth over the next five years to flat to down low-single-digits (from our previous forecast of a positive 2.7% CAGR for revenue during 2022-26).
First-quarter adjusted operating margins of 44.4% were 450 basis points lower than the year-ago period. Management had warned that the firm was likely to see operating expenses grow 12%-16% this year as it folded Oak Hill Advisors into its operations, and it didn't disappoint with costs running 14.3% higher during the March quarter. That said, the company did update its full-year operating expense growth forecast to a range of 10%-14%.
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