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Analyst Blog

On Mar 18, 2013, we reiterated our long-term recommendation on T. Rowe Price Group, Inc. (TROW - Analyst Report) at Neutral based on the company’s potential to take advantage of the economic recovery and benefit from the growth opportunities in the domestic and global assets under management (AUM). However, competitive pressures amid economic headwinds remain the major causes of concern.

Why Neutral?

T. Rowe Price reported its fourth-quarter 2012 net income of 88 cents per share, which though were a penny below the Zacks Consensus Estimate, compared favorably with the prior-year quarter earnings of 73 cents. Top-line growth and increased AUM were the positives for the quarter.

T. Rowe Price remains debt free with substantial liquidity that includes cash and mutual fund investment holdings of about $2.0 billion. This has assisted in strengthening the company’s capital leverage and generating a return on earnings that is substantially higher than the industry average.

In Feb 2013, T. Rowe Price’s board of directors approved a 12.0% hike in the company’s quarterly common stock dividend to be paid on Mar 27, 2013 to stockholders of record as of business on Mar 13, 2012. The revised quarterly dividend now stands at 38 cents per share. This marks T. Rowe’s 27th consecutive annual dividend increase, reflecting the company’s commitment to return value to shareholders with its strong cash generation capabilities.

However, at the current level, the asset management business is under cyclical and secular pressures along with ongoing margin pressures, many of which have been aggravated by the financial crisis. These pressures include volatile markets and new regulatory compliances. Though T. Rowe Price remains well positioned over the long term, given short-term performance hindrances and macro headwinds, a limited upside is expected in the near-term.

The Zacks Consensus Estimate for 2013 has remained stable at $3.79 per share over the last 30 days. Moreover, the Zacks Consensus Estimate for 2014 has moved north by 0.2% to $4.30 over the same time frame. Currently, the company retains a Zacks Rank #3 (Hold).

Other Major Companies to Consider

Besides T. Rowe Price, other investment managers that are worth considering include Apollo Global Management LLC (APO - Snapshot Report), Lazard Ltd. (LAZ - Analyst Report) and Virtus Investment Partners Inc. (VRTS - Snapshot Report). All the companies retain a Zacks Rank #1 (Strong Buy).

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