On Jun 12, 2013, we reiterated our long-term recommendation on T. Rowe Price Group, Inc. (TROW) 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 major concerns.
Why Neutral?
T. Rowe Price 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 AUM, aided by positive net cash inflows. However, elevated operating expenses remain a matter of concern.
T. Rowe Price remains debt free with substantial liquidity that includes cash and mutual fund investment holdings of about $2.5 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.
T. Rowe Price is an attractive asset for yield-seeking investors due to its strong capital deployment activity. In Feb 2013, T. Rowe Price’s board of directors approved a 12.0% hike in the company’s quarterly common stock dividend. 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.
For T. Rowe Price, the Zacks Consensus Estimate for 2013 has moved up by 0.5% to $3.88 per share over the last 60 days. However, the Zacks Consensus Estimate for 2014 has moved down by 0.5% to $4.36 over the same time frame. Hence, the company carries a Zacks Rank #3 (Hold).
Other Major Companies to Consider
Some investment managers that are worth considering include Artisan Partners Asset Management Inc. (APAM), Noah Holdings Limited (NOAH) and Virtus Investment Partners Inc. (VRTS). All the companies carry a Zacks Rank #1 (Strong Buy).
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