The Price Is Right at T. Rowe

OVER THE YEARS, the shares of Baltimore asset manager T. Rowe Price (TROW) would have been a perfect fit for one of its growth-fund portfolios. From June 1998 through the end of last month, the stock notched a 13.4% compound annual return, versus 2.9% for the S&P 500.

But the recent credit crunch-induced market upheaval has pressured the stock; it was trading around 54 late last week, down more than 15% from its 52-week high of 65.46.

The selloff, however, offers a sound entry point to own a company that oversees $380 billion in assets and has a well-respected investment culture. The 71-year-old firm has no debt; among the industry's best operating margins, averaging in the mid-40% range; strong fund performance relative to its peers; disciplined management that returns capital to shareholders; and a growing presence in the increasingly important 401(k) and overseas markets.

What's more, it has sidestepped some of the woes afflicting rivals. While most publicly traded asset managers have seen their shares fall by more than 20% this year, T. Rowe is down just 10%. Legg Mason (LM), a Baltimore neighbor, has dropped 50% this year as it struggles with poor performance in key funds.

Some analysts and money managers believe that T. Rowe's stock could rise 10% or more above recent levels.

T. Rowe Price has "a very consistent message," says David Honold, a financial-services analyst and portfolio manager at Turner Investment Partners, which holds about four million shares. "They are not interested in the latest product or fad in investing. They are focused on consistent, fundamentally-driven investing."

These attributes historically have given it a premium price-earnings multiple among asset managers. Late last week, the stock was fetching 22 times this year's consensus profit estimate of $2.42 a share, compared with an average multiple of 17 for asset managers.

Bears contend that 22 is too high a price-earnings multiple, given the possibility for earnings disappointments in these markets and the firm's reliance on the struggling U.S. equity market. T. Rowe Price depends particularly on individual investors, who tend to pile in and out of funds with the speed and ferocity of subway crowds at rush hour. Roughly 80% of the firm's assets are in equities, the vast majority U.S. holdings, though it does have well-regarded fixed-income funds and non-U.S. equity funds.

T. Rowe has broadened its client base: Today, nearly 10% of its assets come from customers outside the U.S. That's well behind such firms as Franklin Templeton (BEN), which gets about a quarter of its assets from overseas investors, and AllianceBernstein (AB), where foreigners account for 40% of assets. Still, T. Rowe's progress is notable, considering that the company didn't launch its overseas business until 2001. "Growth for growth's sake is not of interest to us," says Todd Ruppert, chief executive of T. Rowe Price Global Investment Services. Starting in the Nordic countries, the firm has built relationships with foreign institutional investors, including sovereign wealth funds, and various intermediaries. Outside the U.S., it has avoided the direct retail market, on which local banks have a stranglehold.

The measured growth of its overseas assets exemplifies T. Rowe's long-term focus. "They manage their capacity very well," says Goldman Sachs analyst Marc Irizarry, who has a Neutral rating on the company, though his 12-month target is 60, or about 10% above recent levels.

No question, these aren't easy times. In the first quarter, net cash flows into T. Rowe's mutual funds totaled $3.7 billion, down from $8.4 billion a year earlier. The firm reports its second-quarter results Friday (July 25). With outflows and declining stock prices weighing on the big money manager, analysts expect full-year earnings to be up only slightly, to $2.42 a share. But any turnaround in the U.S. equity markets would provide a nice lift.

Redemptions from individual investors aside, the company isn't dependent on any one distribution source. Consider that it sells its funds via four channels — 401(k), direct retail, institutional, and third-party, including registered investment advisers. Each channel accounts for 20% to 30% of total assets.

Central to the company's success has been its funds' strong performance. At the end of June, 80% of T. Rowe funds had beaten their Lipper category averages based on three-year returns. For five-year returns, 79% beat their averages, versus 76% for 10-year numbers. "It comes down to our people and our performance," says Jim Kennedy, who took over early last year as chief executive. "If we can perform well, I don't worry about growth."

Kennedy, a veteran of 30 years, oversees a company with an enviable balance sheet. As of March 31, it had $1.4 billion in cash and other liquid investments, but no debt. "Having a strong balance sheet allows you to continue to invest in the business," he says.

T. Rowe bought back nearly $300 million of its stock in the first quarter, at an average price of just below 50 — arguably a very reasonable price — and last month its board authorized acquiring another 15 million shares. It also sports a decent dividend yield, around 2%.