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The T. Rowe Price Is Not Right

T. Rowe Price (TROW) reported first-quarter revenues declined 18% to $1.5 billion with net income tumbling 26% to $411 million and EPS falling 24% to $1.83.

Assets under management fell 13.5% from the prior year's quarter to end at $1.3 trillion, reflecting $16.1 billion in net client outflows given the uncertain market environment and weak demand for large cap growth investment strategies. Preliminary net outflows in April 2023 were $3.7 billion.

Investment advisory fees account for 90% of total revenues. The investment advisory fee declined from 43.2 basis points in the prior year quarter to 42.7 basis points driven by a mix shift toward lower fee asset classes.

T. Rowe Price maintains a strong balance sheet with $4.7 billion in cash and investments, no long-term debt, and $9.0 billion in shareholders’ equity. T. Rowe Price increased its dividend for the 37^th consecutive year, and the dividend currently yields about 4.6%.

At the same time, the company expects consistent organic growth to take some time to resume as the company has lost market share in its equity strategies which comprise the largest part of its portfolios.

Given the decline in sales, earnings, and assets under management, along with continued client outflows,

T. Rowe’s Price is not right. The stock appears more than fully valued given the business's fundamental deterioration and loss of market share, which is prompting us to reluctantly sell the position despite its attractive dividend yield.

Over the last 12 years, T. Rowe Price has provided us with a pleasing 153% total return.
 

So Long, SEI Investments

SEI Investments (SEIC) reported first-quarter revenues fell 19% to $469.1 million with net income dropping 43.8% to $107.0 million and EPS falling 42% to $0.79. Excluding a one-time early termination fee of $88 million or $0.47 per share recorded during last year’s first quarter, revenues declined 4.9% and EPS declined 11.2%.

By business segment, Asset Management, Administration and Distribution Fee revenue declined 5.7% to $371.8 million due to lower assets under management owing to last year’s market decline and client Iosses in the Investment Advisors and Institutional Investors markets. Information Processing and Software Servicing Fee revenues of $97.3 million fell 48%, or 2% excluding last year’s $88.0 million early termination fee. Earnings from LSV declined 11% to $28.9 million on client withdrawals, client losses, and market depreciation. Average equity and fixed-income assets under management, excluding LSV, declined by 12.4% to $254.8 billion while average assets under administration declined by 5.9% to $840.7 million.

Cash flow from operations declined 56% year-over-year to $114.4 million while free cash flow dropped 61.3% to $94.7 million. During the first quarter, SEI repurchased 1.4 million shares of its common stock for $80.3 million at an average price of $59.03 per share with $263 million currently authorized for re-purchase. SEI ended the quarter with $834.4 million in cash and equivalents, no long-term debt, and $2.0 billion in shareholders’ equity on its balance sheet. We have decided to say so long to SEI Investments by selling the position, given the deterioration in business fundamentals with sales, earnings, and free cash flow all declining. The total return after three years is a disappointing 1%.
 

Bank Volatility

Following the failure of Silicon Valley Bank, Signature Bank (SBNY), and First Republic Bank (FRCB), regional banks have been subject to sharp sell-offs and extreme volatility. Bank of Hawaii and Western Alliance were not immune to the financial “contagion” although both banks have strong fundamentals which should allow them to recover. We currently plan to “hold” and monitor both banks closely as we evaluate changing regulations.
 

Quarterly Rating Change From Buy To Hold

Bank Of Hawaii

Bank of Hawaii (BOH) reported first-quarter revenue declined 2.9% to $176.7 million with EPS lower by 13.6% to $1.14. An industry-wide increase in FDIC insurance expenses and higher payroll and separation expenses led to lower earnings. The return on average equity was 15.79% in the first quarter compared to 15.4% in the prior year period. Amid a challenging macro environment for banks, the Bank of Hawaii delivered solid operating performance. Average deposits grew 0.4% in the first quarter and were essentially flat compared with a year ago.

Deposit costs, while rising, continue to benefit from Hawaii’s unique deposit base which is diversified and long-tenured. Approximately 98% of the bank’s depositors are fully FDIC- insured. Over 50% of the bank’s depositors have had a relationship with the bank for more than 20 years. Loans grew 1.3% on a linked quarter basis with growth across both the consumer and commercial portfolios. Credit quality remains excellent with non-performing loans lower than in prior periods.

Net interest margin increased 13 basis points from the prior year quarter to 2.47% due to higher earning asset yields. Total assets increased by 4.1% from a year ago to

$23.9 billion primarily due to growth in earning assets. The bank’s capital levels remain well within the well-capitalized guidelines with the Tier 1 Capital Ratio at 12.1% compared to 13.2% a year ago. During the quarter, the Bank of Hawaii declared its quarterly dividend and repurchased 150,000 shares of its common stock. Bank of Hawaii believes the bank has an exceptional deposit base, substantial liquidity, high-quality assets, and solid regulatory capital which will enable the bank to manage through current challenges in the banking industry. Hold.

Western Alliance

Western Alliance (WAL) reported that first-quarter net revenue dipped by 0.7% to $551.9 million with EPS down 42% to $1.28 as the bank restructured its balance sheet. Return on average assets and on tangible common equity of .81% and 12.2% compared to the prior year of 1.64% and 23.9%, respectively. The recent turbulence in the banking industry impacted results. Following the collapse of Silicon Valley Bank and Signature Bank, Western Alliance experienced elevated net deposit outflows. However, thanks to Western Alliance’s diversified deposit franchise, deposit balances quickly stabilized by the end of the quarter to $47.6 billion, which was a $4.6 billion or 8.8% decline year-over-year. Since quarter end, deposits have increased by more than $2 billion as of May 12th, with total insured deposits representing 79% of total deposits, which is the highest insured deposit percentage among the 50 largest U.S. banks.

The bank’s efficiency ratio held steady at 43.2% with net interest margin expanding to 3.79% from 3.32% compared to the prior year thanks to higher interest rates. The bank continues to exceed well-capitalized levels with a 9.4% Common Equity Tier (CET) 1 ratio.

The bank plans to continue to strengthen its capital by increasing its CET1 ratio to greater than 10% by the second quarter with a medium target of 11%. As a result, share repurchases have been suspended. Western Alliance has significant access to liquidity and funding capacity and repaid all its borrowings from the Federal Reserve discount window by 3/31/23. The bank’s focus on sound financial fundamentals and stable asset quality has helped them navigate through this challenging time. Hold.
 

Quarterly Rating Change From Hold To Buy

Ross Stores $950 Million Share Buyback

Ross Stores (ROST) rang up a 3.7% increase in first quarter sales to $4.49 billion with EPS up 12.4% to $1.09. Comparable store sales increased 1% on healthy traffic. Sales were strongest in cosmetics and accessories. Home goods were flat and apparel sales lagged. Operating margin for the period was 10.1%, down from 10.8% in 2022, primarily reflecting higher incentive compensation.

During the quarter, Ross Stores generated $245.9 million in free cash flow as inventories declined 16% thanks to the lapping of last year’s bloated inventory resulting from the easing of supply chain pressures. Average store inventories increased 2%. Ross returned $349.3 million to shareholders during the quarter through dividends of $114.8 million and share repurchases of $234.5 million at an average cost of $106.36 per share. The company remains on track to repurchase a total of $950 million of stock during fiscal 2023.

Ross Stores ended the quarter with $4.4 billion in cash and equivalents, $2.5 billion in long-term debt and $4.3 billion in shareholders’ equity on its dressy balance sheet. In the second quarter, comparable store sales are projected to be relatively flat with EPS of $1.07 to $1.14 versus $1.11 for the same period last year. Based on first quarter results and guidance for the second quarter, comparable store sales for the 52 weeks ending January 27, 2024, are still planned to be relatively flat. Full fiscal year EPS are expected in the range of $4.77 to $4.99 compared to $4.38 for the 52 weeks ended January 28, 2023. Prolonged inflationary pressures continue to negatively impact customers’ discretionary spending. As such, Ross remains focused on delivering the most compelling values possible to maximize growth. Buy.

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