On Nov 15, 2013, we downgraded our long-term recommendation on T. Rowe Price Group, Inc. (TROW - Analyst Report) to Neutral from Outperform based on increasing expenses, which depict undisciplined expense management. Moreover, stringent regulatory norms remain concerns. However, with a debt-free position, higher return on earnings, and improving investor sentiment witnessed as a whole, we believe fundamentals will remain strong.
Rationale behind Downgrade
Elevated operating expenses remain a major concern for T. Rowe Price. Total operating expenses jumped 10% year over year in the first nine months of 2013, mainly driven by higher compensation and related expenses. Moreover, the company incurs significant expenditures to attract new investment advisory clients and additional investments from existing clients. These efforts involve costs that generally precede future revenues, thereby affecting the overall profitability of the company.
Further, 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.
Related investment income has fluctuated significantly over the years due to the performance of the company’s corporate investments, including the impact of market conditions and interest rates and the size of its corporate money market and longer-term mutual fund holdings. Thereby, based on the current low interest-rate environment, fluctuations in other investment income are expected to continue in the future, and thereby affecting the top line of the company.
For T. Rowe Price, the Zacks Consensus Estimate for 2013 jumped 1.1% to $3.82 per share, over the last 30 days, as 11 out of 17 estimates moved north. For 2014, 4 out of 17 estimates trend higher, pushing the Zacks Consensus Estimate by 0.2% to $4.21 per share, over the same time frame. Hence, the company carries a Zacks Rank #2 (Buy).
Other Major Companies to Consider
Some investment managers that are worth considering include Artisan Partners Asset Management Inc. (APAM - Snapshot Report) , Waddell & Reed Financial, Inc. (WDR - Analyst Report) and GAMCO Investors, Inc. (GBL - Snapshot Report) . All the companies carry a Zacks Rank #1 (Strong Buy).