T. Rowe Price Group Inc.’s (TROW) second-quarter 2011 earnings of 76 cents per share were significantly up from 59 cents reported in the prior-year quarter.
Higher-than-expected top-line growth and higher assets under management (AUM), partially offset by higher operating expenses, cumulated in improved performance. However, the quarter’s earnings were below the Zacks Consensus Estimate by a penny.
Net income increased 29.1% to $204.7 million from $158.5 million in the year-ago quarter.
Performance in Detail
In the second quarter of 2011, net revenue increased 23.6% to $713.7 million from $577.4 million in the year-ago period. The upsurge was primarily due to an increase in investment advisory fees that jumped 24.3% year over year to $611.7 million.
Administrative fees also increased 19.7% year over year to $101.4 million. Net revenue compared favorably with the Zacks Consensus Estimate of $711.0 million.
Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S., inched up 22.0% year over year to $418.1 million in the quarter. Investment advisory revenues earned from other investment portfolios managed by the company increased 30.0% from the year-ago quarter to $193.6 million.
Total operating expenses climbed 19.4% year over year to $387.1 million in the quarter. The increase was primarily attributable to high compensation and related costs (up 15.7% year over year), resulting from an increase in the company's annual variable compensation program, salaries and related benefits.
At the end of the reported quarter, the company employed 5,162 associates. Higher advertising and promotion expenditures, occupancy and facility costs and other operating expenses added to higher expenses in the quarter.
Assets Position
Total AUM increased to $520.9 billion as of June 30, 2011, up 2.2% compared with $509.9 billion as of March 31, 2011. Market appreciation and income of $1.2 billion and net cash inflows of $9.8 billion added to AUM at the end of the reported quarter. Average AUM increased 24.5% year over year to $514.9 million in the second quarter of 2011.
T. Rowe Price remains debt-free with substantial liquidity, including cash and mutual fund investment holdings of about $1.8 billion, which supports the company’s ability to continue to invest in the future periods. As of June 30, 2011, the company had $610.5 million in operating cash flows, including $46.4 of stock-based compensation in 2011 compared with $452.2 million as of June 30, 2010.
As of June 30, 2011, the company repurchased 4.0 million shares of its common stock for $241 million.
The closest competitor of T. Rowe price, Virtus Investment Partners Inc. (VRTS) is expected to report its second-quarter 2011 earnings on August 2, 2011.
Outlook
T. Rowe price expects its advertising and promotion expenditures for the third quarter of 2011 to be comparable with the reported quarter. Moreover, spending for the full-year 2011 is expected to increase approximately 15% from 2010 levels.
The company based its expectations on market conditions and investor demand coupled with its efforts to increase its investor base in the United States and abroad.
Based on its current strategic projects and plans, T. Rowe Price has estimated capital expenditures for fiscal 2011 to be approximately $106 million. These cash expenditures are expected to be funded from internal resources.
Our Take
T. Rowe Price’s financial stability has the potential to take advantage of the improving economy and benefit from the growth opportunities in the domestic and global AUM.
With a debt-free position, higher return on earnings and improving investor sentiment witnessed in the current quarter, we believe fundamentals are expected to remain strong. Furthermore, relative mutual fund performance was also positive. However, higher operating expenses and stringent regulatory norms could be causes of concerns
T. Rowe Price currently retains its Zacks #3 Rank, which translates to a short-term Hold rating. Considering the fundamentals, we are maintaining a Neutral recommendation on the stock.
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