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T. Rowe Price Lags Ests by a Penny

Zacks Equity Research

T. Rowe Price Group Inc.’s (TROW) second-quarter 2012 net income of 79 cents per share were below the Zacks Consensus Estimate by a penny. However, earnings compared favorably to 76 cents reported in the prior-year quarter.

Higher-than-expected top-line growth was a positive for the quarter. Yet, elevated operating expenses were a dampener.  Net income increased 1% to $206.8 million from $204.7 million in the year-ago quarter.

Performance in Detail

Net revenue increased 3.2% to $736.8 million from $713.7 million in the year-ago period. The upsurge was primarily due to an increase in investment advisory fees that rose 3% year over year to $630.0 million. Yet, net revenue compared unfavorably with the Zacks Consensus Estimate of $751.0 million.

Administrative fees also increased 3.1% year over year to $82.7 million. Distribution and servicing fees climbed 11.8% y/y to $23.7 million. However, net revenue of savings bank subsidiary declined 33.3% year over year to $0.4 million.

Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S., jumped 4% year over year to $434.3 million. Investment advisory revenues earned from other investment portfolios managed by the company increased 1.1% from the year-ago quarter to $195.7 million.

Total operating expenses climbed 5.6% y/y to $408.8 million in the quarter. The increase was primarily attributable to high distribution and servicing costs (up 11.8% year over year), depreciation and amortization expense, and compensation and related costs. Slightly lower advertising and promotion expenditures reduced expenses in the quarter.

As of June 30, 2012, T. Rowe Price employed 5,265 associates, up 2.3% year over year.

Assets Position

Total assets under management increased to $541.7 billion as of June 30, 2012, down 2.4% compared with $554.8 billion as of March 31, 2012. Market depreciation of $17.8 billion has mostly offset the net cash inflows of $4.7 billion in the reported quarter.
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 to invest in the future periods. As of June 30, 2012, the company had $494.5 million in operating cash flows, including $50 million of stock-based compensation in 2012 compared with $610.5 million as of June 30, 2011.

During the second quarter of 2012, the company repurchased 2.2 million shares of its common stock for $129.2 million. Moreover, the firm invested $36.6 million in capitalized technology and facilities during the first half of 2012. T. Rowe Price is expecting capital expenditures for the year 2012 to be approximately $100 million for property and equipment additions.

Our Viewpoint

T. Rowe Price’s financial stability has the potential to take benefit from the growth opportunities in the domestic and global assets under management. With a debt-free position, higher return on earnings and improving investor sentiment witnessed as a whole, we believe fundamentals will continue to remain strong.

Furthermore, relative mutual fund performance was also positive. However, higher operating expenses and stringent regulatory norms could be causes for concern.

Shares of T. Rowe Price currently retain a Zacks #3 Rank, which translates to a short-term Hold rating. Considering the fundamentals, we also maintain a ‘Neutral’ recommendation on the stock.

One of T. Rowe Price’s peers, Virtus Investment Partners Inc. (VRTS) is expected to report its second quarter 2012 earnings results on August 1, 2012.

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Read the Full Research Report on VRTS

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