T. Rowe Price Group Inc.’s (TROW) third-quarter 2011 earnings of 71 cents per share were significantly up from 64 cents reported in the prior-year quarter. Higher-than-expected top-line growth, partially offset by higher operating expenses, cumulated in improved performance. However, the quarter’s earnings were below the Zacks Consensus Estimate by 2 cents per share.
Net income increased 9.7% to $185.5 million from $169.1 million in the year-ago quarter.
Performance in Detail
Net revenue increased 15.9% to $679.4 million from $586.1 million in the year-ago period. The upsurge was primarily due to an increase in investment advisory fees that jumped 15% year over year to $578.0 million. Administrative fees also increased 21.6% year over year to $100.8 million. However, net revenue compared unfavorably with the Zacks Consensus Estimate of $707.0 million.
Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S., jumped 16.0% year over year to $397.8 million in the quarter. Investment advisory revenues earned from other investment portfolios managed by the company increased 14.0% from the year-ago quarter to $180.2 million.
Total operating expenses climbed 18.5% year over year to $324.2 million in the quarter. The increase was primarily attributable to high compensation and related costs (up 17.5% 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 5,249 associates. Slightly higher advertising and promotion expenditures, increased occupancy and facility costs and other operating expenses added to higher expenses in the quarter.
Assets Position
Total assets under management (AUM) decreased to $453.5 billion as of September 30, 2011, down 12.9% compared with $520.9 billion as of June 30, 2011. Market depreciation, net of income of $64.8 billion and net cash outflows of $2.6 billion led to decline in AUM at the end of the reported quarter. However, average AUM increased 17.9% year over year to $490.5 million in the third quarter of 2011.
T. Rowe Price remains debt-free with substantial liquidity, including cash and mutual fund investment holdings of about $1.7 billion, which supports the company’s ability to continue to invest in the future periods. As of September 30, 2011, the company had $940.5 million in operating cash flows, including $73.8 of stock-based compensation in 2011 compared with $711.5 million as of September 30, 2010.
As of September 30, 2011, the company repurchased 8.5 million shares of its common stock for $470 million.
The closest competitor of T. Rowe price, Virtus Investment Partners Inc. (VRTS) is expected to report its third-quarter 2011 earnings on November 1, 2011.
Outlook
T. Rowe price expects its advertising and promotion expenditures for the fourth quarter of 2011 to be comparable with the reported quarter. 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 2011 to be approximately $93 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 will continue to remain strong. Furthermore, relative mutual fund performance was also positive. However, higher operating expenses and stringent regulatory norms could be causes of concern.
T. Rowe Price currently retains its Zacks #4 Rank, which translates to a short-term ‘Sell’ rating. However, considering the fundamentals, we are maintaining a “Neutral” recommendation on the stock.
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