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Why Is T. Rowe (TROW) Down 12.3% 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 12.3% 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 the most recent earnings report in order to get a better handle on the important catalysts.

T. Rowe Price Q4 Earnings Impress on High Revenues

T. Rowe Price reported a positive earnings surprise of 4.1% in fourth-quarter 2019. Adjusted earnings per share came in at $2.03, outpacing the Zacks Consensus Estimate of $1.95. The reported figure also improved 31.8% from the year-ago quarter.

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

Including certain non-recurring items, net income came in at $545.3 million or $2.24 per share compared with the $351.9 million or $1.41 per share recorded in the prior-year quarter.

For full-year 2019, the company reported adjusted net income of $1.98 billion or $8.07 per share as against the year-ago income of $1.81 billion or $7.15 per share. The bottom line beat the Zacks Consensus Estimate of $8.03 per share.

Revenues Improve, Expenses Flare Up

For full-year 2019, net revenues came in at $5.6 billion, up 4.6% year over year. This upside was primarily driven by an increase in investment advisory fees. Moreover, net revenues came almost in line with the Zacks Consensus Estimate.

Net revenues in the fourth quarter increased 12.5% to $1.47 billion from the year-ago quarter. This upswing primarily resulted from higher investment advisory fees, along with elevated administrative, distribution and servicing fees. The net revenue figure also outpaced the Zacks Consensus Estimate of $1.45 billion.

Investment advisory fees climbed 13.6% year over year. Also, administrative, distribution and servicing fees escalated 2.2% year over year to $124 million.

Investment advisory revenues earned from T. Rowe Price mutual funds, distributed in the United States, were up 9.4% year over year to $894.9 million. Investment advisory revenues earned from other investment portfolios, managed by the company, increased 23% from the prior-year quarter to $449.8 million.

Total adjusted operating expenses flared up 8.7% year over year to $863.5 million in the reported quarter. Rise in headcount, continued strategic investments and elevated bonus and stock-based compensation expense mainly resulted in this upsurge. Including certain one-time items, expenses were $888.4 million, up 16.5%.

As of Dec 31, 2019, T. Rowe Price employed 7,365 associates, around 4.9% higher than the last year.

Strong Assets Position

As of Dec 31, 2019, total AUM climbed 25.4% year over year to $1.21 trillion. During the October-December quarter, net market appreciation and income, came in at $79.4 billion, while net cash inflow was $2.8 billion after client transfers.

T. Rowe Price remains debt free with substantial liquidity, including cash and sponsored portfolio investment holdings of about $5.6 billion as of Dec 31, 2019, which enable the company to keep on investing.

Capital-Deployment Activity

During 2019, T. Rowe Price repurchased 7 million shares of its common stock for $708.8 million and at an average cost of $101.65 and invested $204.6 million in capitalized technology and facilities using available cash balances.

During the reported quarter, T. Rowe Price repurchased 1.3 million shares of its common stock for $142 million at an average cost of $110.89.

For 2020, the company projects capital expenditures at approximately $210 million, comprising three-fourth for technology development.

Outlook

T. Rowe Price projects full-year 2020 non-GAAP operating expense growth of 6-9%. This guidance reflects continued investments in the business and technology, cost optimization efforts and concluding part of the phased implementation of making payments to all third-party investment research.

How Have Estimates Been Moving Since Then?

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

VGM Scores

At this time, T. Rowe has a subpar Growth Score of D, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

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

Outlook

Estimates have been 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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