Behind The Numbers – T Rowe Price (TROW) Distribution Platforms Bearing Fruit

On June 17th, we presented a bullish view to clients highlighting multiple reasons why we like the stock for further upside. The bull case panned out perfectly today after T Rowe Price (TROW) posted a fabulous quarter with +3% organic growth even when traditional peers are posting flat growth. TROW organic results performed even better than institutional leader BlackRock (BLK) which saw net flow trajectory slip as institutional took a “pause.”

Behind The Numbers – In October 2017, CEO Bill Stromberg made a bold decision to aggressively start reaching out to advisers. Several multi-year deals were signed including tapping into Schwab and Fidelity no-transaction-fee platforms, longtime favorites of registered investment advisers. Additionally, TROW expanded team to regional investment consultants and started targeting locally based RIAs with surprising aggressive gusto. To make sure TROW gets the business, it also did two things internally: 1) added series of retirement income (managed payout) portfolios including multi-strategy retirement trusts launch in 2018 to give its platform partners more choices, and 2) it worked diligently to lower the operational cost which was clearly visible in Q2 earnings report and implied guidance (management is targeting decelerating expense growth from 9.5% in FY2018 to 7% in FY2019, thus creating operational leverage.

Combination of aggressive push to get non-transaction-fee platform partnerships with big RIAs and cost cuts makes TROW earnings report card a stand out in a tough quarter where peers are lagging. Should keep thick bids under the stock.

Tuck-in M&A Ahead? – TROW finished Q2 with $2.6 billion excess capital. What are they going to do with this? Management has said previously that only 6% of AuM is from outside of US and it particularly lacks interest in Alts and ETFs. Within the US, TROW acquired Henderson’s High Yield team in 2017 based in Philly. More such acquisitions to come?