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T. Rowe Price Group, Inc. (TROW - Analyst Report) reported its second-quarter 2013 net income of 92 cents per share, missing the Zacks Consensus Estimate by a sliver. However, this significantly outperformed the year-ago earnings of 79 cents.

Results improved on a year-over-year basis, driven by top-line growth, a strong capital position and improved assets under management (AUM). However, elevated operating expenses remain a matter of concern.

T. Rowe Price’s net income came in at $247.8 million, surging 19.8% from the prior-year quarter income of $206.8 million.

Performance in Detail

Net revenue increased 15.9% to $854.3 million from $736.8 million in the year-ago period. The rise was primarily due to an increase in investment advisory fees that climbed 17.4% year over year to $739.7 million. However, net revenue marginally lagged the Zacks Consensus Estimate of $859 million.

Administrative fees also increased 4.5% year over year to $86.4 million. Distribution and servicing fees escalated 18.6% year over year to $28.1 million. However, net revenue of the savings bank subsidiary registered a sharp decline of 75.0% year over year to $0.1 million.

Investment advisory revenues, earned from the T. Rowe Price mutual funds distributed in the U.S., jumped 20% year over year to $519.4 million. Investment advisory revenues earned from other investment portfolios managed by the company increased 12.6% from the year-ago quarter to $220.3 million.

Total operating expenses climbed 11.4% year over year to $455.5 million in the quarter. The increase was primarily attributable to high distribution and servicing costs, which grew 18.6% year over year, increased depreciation and amortization expense, elevated compensation and related costs along with escalated occupancy and facility costs.

As of Jun 30, 2013, T. Rowe Price employed 5,448 associates, 3.5% higher than last year.

Assets Position

Total AUM increased to $614.0 billion as of Jun 30, 2013, up 6.4% from $576.8 billion as of Dec 31, 2012. However, AUM decreased slightly on a sequential basis. During the quarter, market appreciation and income came in at $4.6 billion, offset by net cash outflows of $8.0 billion.

T. Rowe Price remains debt-free with substantial liquidity, including cash and sponsored portfolio investment holdings of about $2.7 billion, which support the company’s ability to continue investing in the future periods. This compared favorably with the prior-year quarter figure of $2.5 billion. The company had $727.9 million in operating cash flow for the six months ended Jun 30, 2013, up 47.2% year over year.

Capital Deployment Activity

T. Rowe Price is expecting capital expenditures in 2013 to be approximately $125 million for property and equipment additions.

We believe that despite active competition, the company has a significant long-term upside potential based on its disciplined risk-aware investment approach, which focuses on diversification, consistency in style and fundamental research.

Our Viewpoint

T. Rowe Price’s financial stability has the potential to 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 a positive. However, higher operating expenses and stringent regulatory norms remain concerns.

Currently, shares of T. Rowe Price carry a Zacks Rank #3 (Hold). Among other investment managers, Legg Mason Inc. (LM - Analyst Report), Janus Capital Group, Inc. (JNS - Analyst Report) and Lazard Ltd. (LAZ - Analyst Report) are scheduled to report June quarter-end results on Jul 25, 2013.

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