T. Rowe Price Misses on Higher Exps

Zacks

T. Rowe Price Group Inc. (TROW) reported its first-quarter 2012 earnings of 75 cents per share, marginally below the Zacks Consensus Estimate of 77 cents. However, this compares favorably with the prior-year quarter’s earnings of 72 cents.

Better-than-expected top-line growth was more-than-offset by higher non-interest expenses. However, increased assets under management (:AUM) were positive for the quarter.

T. Rowe Price’s net income available to common shareholders grew 1.4% to $196.5 million from $193.8 million in the year-ago quarter.

Behind the Headlines

Net revenue improved 6.8% to $728.7 million from $628.4 million in the year-ago period. The upsurge was largely due to higher distribution and servicing fees (up 74.8% from the year-ago quarter), investment advisory fees (up 5.8% from the prior-year quarter) and administrative fees (up 3.1% from the prior-year quarter). Moreover, net revenue surpassed the Zacks Consensus Estimate of $713.0 million.

Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S., climbed 6.3% year over year to $425.9 million in the quarter under review. Investment advisory revenues earned from other investment portfolios, which are managed by the company, increased 4.7% from the year-ago quarter to $197.1 million.

Total operating expenses jumped 11.2% year over year to $412.5 million in the reported quarter. The increase was primarily attributable to higher compensation and related costs, distribution and servicing costs as well as depreciation and amortization expense.

Assets Position

Total AUM increased to $554.8 billion as of March 31, 2012, up 13.3% compared with $489.4 billion as of December 31, 2011. Market appreciation and income of $52.9 billion along with net cash inflows of $12.4 billion led to a substantial increase in AUM at the end of the reported quarter. Moreover, average AUM increased 6.4% year over year to $530.3 million in the first-quarter of 2012.

Balance Sheet

T. Rowe Price remains debt-free with substantial liquidity, including cash and mutual fund investment holdings of about $1.9 billion, which supports the company’s ability to continue investing in the future. As of March 31, 2012, the company had $265.8 million in operating cash flows, including $24.1 of stock-based compensation.

T. Rowe Price expects capital expenditures for the year 2012 to be approximately $100 million for property and equipment additions.

Our Take

T. Rowe Price’s financial stability has the potential to take advantage of the improving economy and benefit from the growth opportunities in the domestic and global AUM. With a debt-free position and higher return on earnings, we believe that the fundamentals will continue to remain strong. However, higher operating expenses and stringent regulatory norms could be the causes of concern.

One of the peers of T. Rowe price, Waddell & Reed Financial Inc. (WDR) is expected to report its first-quarter 2012 earnings on April 30.

T. Rowe Price currently retains its Zacks #1 Rank, which translates to a short-term ‘Strong Buy’ rating.

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