Goldman is downgrading shares of T. Rowe Price (NASDAQ:TROW) to Sell from Neutral. Firm's 12-month DCF and P/E based price target is $28, unchanged, implying 24% downside. They believe TROW’s current 60% P/E premium to the group (versus a historical 20% premium) is unsustainable amid accelerating fundamental headwinds including expected net outflows, slipping relative investment performance, and deteriorating operating margins. Goldman views T. Rowe as a long-term beneficiary of market turmoil, but they see the shares under- performing on a relative basis over the coming quarters.
Catalyst
T. Rowe’s strong financial position (a solid $853 mm in net cash or $3 per share) has rendered the stock a relative safe haven, leading to meaningful outperformance versus peers (+24% relative YTD). That said, shares now trade at 25X 2009E EPS or a 60% premium to peer average – a level they view as unsustainable given rising fundamental headwinds. Specifically, they expect 4Q08 to mark TROW’s first quarter of net outflows since 2001 due to weak equity absolute performance and slowing target date flows, while rising unemployment pressures the firm’s retail-heavy business mix and 401(K) flows. Further, TROW’s recent relative investment performance has slipped with the asset weighted Morningstar rating in October at 3.6, down from 4.0 a year ago. In addition, Goldman sees the firm steering clear of expense reductions to gain share (in comparison to peers cutting costs), which they expect to drive operating margin 900bps below pre- downturn levels – a decline similar to the early 2000’s.
Notablecalls: A Sell rating from GSCO on a stock that's trading 25x 2009 EPS - a recipe to get whacked.
I see TROW down 5-7% today. Lets see if I'm right on this o
Catalyst
T. Rowe’s strong financial position (a solid $853 mm in net cash or $3 per share) has rendered the stock a relative safe haven, leading to meaningful outperformance versus peers (+24% relative YTD). That said, shares now trade at 25X 2009E EPS or a 60% premium to peer average – a level they view as unsustainable given rising fundamental headwinds. Specifically, they expect 4Q08 to mark TROW’s first quarter of net outflows since 2001 due to weak equity absolute performance and slowing target date flows, while rising unemployment pressures the firm’s retail-heavy business mix and 401(K) flows. Further, TROW’s recent relative investment performance has slipped with the asset weighted Morningstar rating in October at 3.6, down from 4.0 a year ago. In addition, Goldman sees the firm steering clear of expense reductions to gain share (in comparison to peers cutting costs), which they expect to drive operating margin 900bps below pre- downturn levels – a decline similar to the early 2000’s.
Notablecalls: A Sell rating from GSCO on a stock that's trading 25x 2009 EPS - a recipe to get whacked.
I see TROW down 5-7% today. Lets see if I'm right on this o
No comments:
Post a Comment