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Morningstar | Solid Organic Growth and Limited Fee Compression Lifts T. Rowe Price's 2Q and First-Half Results. See Updated Analyst Note from 25 Jul 2018

We've increased our fair value estimate for wide-moat T. Rowe Price to $125 per share from $115 following the release of strong first-half results from the firm. The majority of our change is related to an uptick in our assumptions about organic growth this year, which we expect to come in above our forecast range of 0%-2%, as well as slightly better pricing than we were projecting for the firm's mutual funds.

T. Rowe Price's total AUM of $1.044 trillion was up 2.9% sequentially and 15.5% year over year, despite the increased market volatility we've since the start of the year. While net inflows of $7.6 billion during the second quarter were a step down from the company's reported $11.3 billion during the first quarter, this does not concern us all that much given the seasonality in flows (with the first quarter tending to be the strongest period for flows in any given year) and the fact that the second quarter's flows were much better than the $1.3 billion quarterly run rate we've seen over the past five years. The firm's strong organic growth has been driven by solid long-term investment performance and increased penetration of the retail channel.

While average AUM was up 17.0% year over year during the second quarter, T. Rowe Price reported a 13.4% gain in quarterly revenue, due to a decline in administrative, distribution and servicing fees, as well as a lowering of its overall effective fee rate to 0.468% from 0.472%. First-half top-line growth of 15.3% was modestly above our forecast revenue growth in a high-single to double-digit range this year, albeit with the firm facing some headwinds in the back half of 2018. As for profitability, adjusted operating margins of 44.1% during the first two quarters of the year were 185 basis points higher than 2017 levels, as compensation and other expenses expanded at a slower rate than revenue. This was in line with our forecast range of 43%-45%.