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T. Rowe Price Group, Inc. (TROW - Analyst Report) reported its third-quarter 2013 net income of $1.00 per share, beating the Zacks Consensus Estimate by a nickel. Moreover, this significantly outperformed the year-ago earnings of 87 cents.

The improvement in results was 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 $270.3 million, surging 25.1% from the prior-year quarter income of $216.1 million.

Performance in Detail

Net revenue increased 14.9% to $884.4 million from $769.7 million in the year-ago period. The rise was primarily due to an increase in investment advisory fees that climbed 16.2% year over year to $768.3 million. Moreover, net revenue outpaced the Zacks Consensus Estimate of $870.0 million.

Administrative fees also increased 2.4% year over year to $85.4 million. Distribution and servicing fees escalated 25.0% year over year to $30.5 million. However, net revenue of the savings bank subsidiary registered a sharp decline of 60.0% year over year to $0.2 million.

Investment advisory revenues, earned from the T. Rowe Price mutual funds distributed in the U.S. jumped 18% year over year to $541.3 million. Investment advisory revenues earned from other investment portfolios managed by the company increased 11.7% from the year-ago quarter to $227.0 million.

Total operating expenses climbed 11.6% year over year to $458.5 million in the quarter. The increase was primarily attributable to high distribution and servicing costs, which grew 25.0% year over year, increased depreciation and amortization expense, elevated compensation and related costs along with escalated occupancy and facility costs.

Notably, to expand international facilities along with the update of its technology capabilities to fulfill increasing business demands, T. Rowe Price incurred additional costs. The company expects these costs to mount in fourth-quarter 2013 around 10% sequentially as two new buildings located at its Owings Mills, Md. campus are under service.

As of Sep 30, 2013, T. Rowe Price employed 5,554 associates, 4.4% higher than last year.

Assets Position

Total AUM increased 5.4% to $647.2 billion as of Sep 30, 2013 from $614.0 billion in the prior quarter. During the quarter, market appreciation and income came in at $40.6 billion, partially offset by net cash outflows of $7.4 billion.

T. Rowe Price remains debt-free with substantial liquidity, including cash and sponsored portfolio investment holdings of about $3.0 billion, which support the company’s ability to continue investing in the future periods. This compares favorably with the prior-quarter figure of $2.7 billion. The company had $1.2 billion in operating cash flow for the nine months ended Sep 30, 2013, up 39.5% year over year.

Capital Deployment Activity

T. Rowe Price is expecting capital expenditures in 2013 to be approximately $120 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 #2 (Buy). Among other investment managers, Legg Mason Inc. (LM - Analyst Report) is scheduled to report September quarter end results on Oct 25, Ameriprise Financial, Inc. (AMP - Analyst Report) on Oct 29 and Invesco Ltd. (IVZ - Analyst Report) on Oct 31.

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