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Why Is T. Rowe (TROW) Down 4.2% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for T. Rowe Price (TROW). Shares have lost about 4.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is T. Rowe due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

T. Rowe Price's Q2 Earnings Top Estimates on High Revenues

T. Rowe Price reported a positive earnings surprise of 6.3% in second-quarter 2019. Adjusted earnings per share came in at $2.03, outpacing the Zacks Consensus Estimate of $1.91. Results also improved 14.7% from the year-ago figure of $1.77.

Results were driven by higher AUM and revenues. However, escalating expenses was an undermining factor.

Including certain non-recurring items, net income came in at $527.5 million or $2.15 per share compared with $448.9 million or $1.77 per share recorded in the prior-year quarter.

Revenues Up Y/Y, Expenses Flare Up

Net revenues in the second quarter escalated 3.7% to $1.4 billion from the year-ago quarter. This upside primarily resulted from higher investment advisory fees, partly offset by lower administrative, distribution and servicing fees. The net revenue figure came almost in line with the Zacks Consensus Estimate.

Investment advisory fees climbed 4.6% year over year. However, administrative, distribution and servicing fees declined 4.3% year over year to $125 million.

Investment advisory revenues earned from the T. Rowe Price mutual funds, distributed in the United States, were up 1.6% year over year to $860.7 million. Investment advisory revenues earned from other investment portfolios, managed by the company, increased 11.4% from the prior-year quarter to $409.5 million.

Total adjusted operating expenses flared up 2.6% year over year to $764.6 million in the second quarter. Rise in almost all components of expenses resulted in this upsurge. Including certain one-time items, expenses were $780.1 million, up 4%.

Notably, the company expects 2019 adjusted operating expenses in the range of 4-7%.

As of Jun 30, 2019, T. Rowe Price employed 7,225 associates, around 3.5% higher than the last year.

Strong Assets Position

As of Jun 30, 2019, total AUM climbed 7.7% year over year to $1.13 trillion. During the April-June quarter, net market appreciation and income, came in at $41 billion, while net cash inflow was $2.5 billion after client transfers.

T. Rowe Price remains debt free with substantial liquidity, including cash and sponsored portfolio investment holdings of about $5.2 billion as of Jun 30, 2019, which enable the company to keep on investing.

Capital-Deployment Activity

During second-quarter 2019, T. Rowe Price repurchased 1.6 million shares of its common stock for $163.8 million, and invested $94.5 million in capitalized technology and facilities using available cash balances in the first six months of 2019.

For 2019, the company projects capital expenditures to be approximately $200 million, comprising two-third for technology development.

Outlook

Management currently expects 2019 non-GAAP operating expenses to grow in the range of 4-7%, driven by continued investments in the business, cost-optimization efforts and the phased implementation of paying for all third-party investment research. All third-party investment research costs are likely to be fully accounted for in 2020 operating expenses.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month.

VGM Scores

Currently, T. Rowe has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise T. Rowe has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.



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