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T. Rowe Price Group, Inc. (TROW - Analyst Report) reported its first-quarter 2013 net income of 91 cents per share, marginally outpacing the Zacks Consensus Estimate by 2 cents. Moreover, earnings significantly outperformed the prior-year quarter earnings of 75 cents.

Better-than-expected results were driven by top-line growth and improved assets under management (AUM), aided by positive net cash inflows. However, elevated operating expenses remain a matter of concern.

T. Rowe Price’s net income came in at $242 million, surging 22% from the prior-year quarter’s income of $198 million.

Performance in Detail

Net revenue increased 11.9% to $816 million from $729 million in the year-ago period. The rise was primarily due to an increase in investment advisory fees that climbed 12.8% year over year to $703 million. However, net revenue was marginally below the Zacks Consensus Estimate of $817 million.

Administrative fees also increased 3.6% year over year to $86 million. Distribution and servicing fees escalated 18.2% year over year to $26 million. However, net revenue of the savings bank subsidiary declined 50.0% year over year to $0.3 million.

Investment advisory revenues, earned from the T. Rowe Price mutual funds distributed in the U.S., jumped 15% year over year to $491 million. Investment advisory revenues earned from other investment portfolios managed by the company increased 7.6% from the year-ago quarter to $212 million.

Total operating expenses climbed 7.3% year over year to $443 million in the quarter. The increase was primarily attributable to high distribution and servicing costs, which grew 18.2% year over year, increased depreciation and amortization expense, elevated compensation and related costs along with escalated occupancy and facility costs.

As of Mar 31, 2013, T. Rowe Price employed 5,408 associates, 3.2% higher than last year.

Assets Position

Total AUM increased to $617.4 billion as of Mar 31, 2013, up 7% from $574.4 billion as of Mar 31, 2012. During the quarter, market appreciation and income came in at $37.3 billion along with net cash inflows of $3.3 billion.

T. Rowe Price remains debt-free with substantial liquidity, including cash and sponsored portfolio investment holdings of about $2.5 billion, which support the company’s ability to continue investing in the future periods. As of Mar 31, 2013, the company had $459.4 million in operating cash flows.

Capital Deployment Activity

The company’s board of directors approved a 12% hike in the quarterly common stock dividend in Feb 2013. The revised quarterly dividend now stands at 38 cents per share compared with the previous amount of 34 cents.

This marks the 27th consecutive annual dividend increase for this investment manager, reflecting its commitment to return value to shareholders with its strong cash generation capabilities. Prior to this hike, the company had increased its dividend by 10% (from 31 cents to 34 cents per share) in Mar 2012.

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, style consistency 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 could be causes of concern.

Currently, shares of T. Rowe Price retain a Zacks Rank #2 (Buy). Among other investment managers, Virtus Investment Partners Inc. (VRTS - Snapshot Report) is expected to report on Apr 29, 2013, while Invesco Ltd. (IVZ - Analyst Report) and Affiliated Managers Group, Inc. (AMG - Analyst Report) are scheduled to report on Apr 30, 2013.

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