T. Rowe Price: A Value Play with Options to Win
Unpacking T. Rowe Price’s undervalued position and LEAPS potential
Greetings, Team Thunder!
It is with great joy that I bring you a new company and some LEAPS to go with it. Lately, my posts have been focused on reviewing and running down our past positions, but today, I’m introducing T. Rowe Price Group. They are an investment management company specializing in actively managed funds, advisory services, retirement accounts, and most things investing-related.
This find came directly out of the book club project and from trying to guess which companies may emerge as winners if certain plans come to pass. For example, if there is a push for Social Security privatization, this company could be one of the big winners. Even without that catalyst, it’s a great "low-likelihood but high-impact" possibility to add to the pro column. Additionally, I believe that under the Trump administration, the likelihood of rule changes favoring actively managed investments was far higher.
Before I get too far into the weeds on all those “could-bes,” let’s look at why I like T. Rowe as a company.
T. Rowe Price has been around for almost 100 years, with its founding in 1937. A pioneer of growth stock investing, this is one of the few companies that has committed to active management as a strategy and does relatively little with passive or index-type funds. The company tends to maintain a conservative financial setup, with cash on hand and low debt most of the time.
Over the past five years, the stock has been mostly flat. It took a dive during COVID before rocketing up in 2022 to reach all-time highs. Things came back down to earth, and it has been flat again for the past few years. Recently, it has fallen approximately 15% to near its one-year low. As of this weekend, it trades at around $108 per share. Each share represents earnings of $9.13 over the past 12 months and about $18 in cash that the company has on hand. The total market cap right now is $24.12 billion.
Regarding debt, the company has just $700 million—approximately 3% of its market cap. This year, it is expected to earn $9.42 per share, according to 14 analysts, rising slightly to $9.47 per share next year (2025), also based on estimates from 14 analysts. Earnings growth thereafter is projected to be 8% annually. Priced at a trailing 12-month P/E ratio of 11.88, this is a cheap stock by most metrics. It is priced for zero growth, even though it should have some solid single-digit growth. With almost no debt and a significant amount of cash on hand, this may not be a rocket ship delivering 20% annual earnings growth, but it is as solidly positioned financially as a company as I have seen. It is near its 12-month low, and from both a valuation and earnings potential perspective, it’s hard to see how it has anywhere to go but up from here.
Let’s take a look at its historical earnings multiples and model out some future stock prices to assess its LEAPS. As mentioned earlier, the stock currently trades at an 11.9 P/E ratio, while historically, it has averaged around 14.3 over the past five years. During the COVID speculation craze of 2022, it was very highly valued at a P/E of 17, which has pulled the average up. Looking at pre-COVID levels—likely a better representation of the current environment—the stock typically traded at a multiple of 10 to 14, with most trading in the 12 to 14 range. These seem like the most reasonable benchmarks to use for modeling.
For my low point, I will use today’s valuation of 11.9, as it reflects the current market sentiment and is close to 12. For the high end, I will use the 5-year average of 14.3, which aligns with pre-COVID peaks as well.
What earnings should we expect come January 2027? Taking the 2025 projected range of $8.89 to $9.73, with a consensus of $9.47, and applying 8% annual growth (the current projection), we get a range of $9.60 to $10.50, with an off-consensus figure of $10.22. Plugging these numbers into my table using the above P/E ratios will give us a clearer view of potential stock prices.
This is a favorable situation where multiple paths could lead to a P/E expansion. Even with profits not expected to rise dramatically, a combination of modest growth and an expanding valuation could result in a tidy gain.
As for the options, they are currently priced as follows:
We can use those option prices to model the potential return at the 20 strikes closest to the money. Let’s see what that looks like:
This shows that all the in-the-money strikes should have a good chance of breaking even. However, buying out-of-the-money options quickly introduces a wipeout risk at the lower valuation price of $121.62. In the scenario where the P/E has expanded and the stock is trading around $146.15, many options deliver doubles, with some reaching as high as 2.5x returns. That said, many of these involve out-of-the-money strikes, which come with paths to wipe out if the stock remains at lower valuations.
This leads me to like the $105 strike. It has a good chance of breaking even at the lower end of performance while offering paths to a 2.5x return if things go well. I will be adding this strike to the scoreboard!
Summary
There you have it—another rundown on a great company. T. Rowe Price has a lot going for it, and it’s about as cheap as it has been in the past five years. This creates opportunities for LEAPS that typically wouldn’t exist for this company. The $105 strike will be on the scoreboard with a starting price of $16.70.
The book club gave me some fresh ideas to chase, and this one turned out to be a gem. It just goes to show that you should never stop learning. The past can reveal much about the future.
Look for a few more posts this week, including Book Club Update #2!
Regards,
S. Andrew