Driven by strong top-line performance, T. Rowe Price Group, Inc. (TROW) reported its second-quarter 2014 net income of $1.13 per share, beating the Zacks Consensus Estimate by a penny. Moreover, this significantly outperformed the year-ago earnings of 92 cents.
Despite beating expectations, shares were down 2.33% as it was not able to meet investors' expectations.
Better-than-expected results were driven by top-line growth and improved assets under management (AUM). Moreover, a strong capital position was a positive. However, elevated operating expenses were a concern.
Net income came in at $305.8 million compared with $247.8 million in the prior-year quarter.
Performance in Detail
In the second quarter, net revenue increased 15.2% to $984.3 million from $854.3 million in the year-ago period. The rise was primarily due to an increase in investment advisory fees that jumped 15.6% year over year to $855.3 million. However, net revenue lagged the Zacks Consensus Estimate of $988.0 million.
Administrative fees also increased 8.3% year over year to $93.6 million. Distribution and servicing fees escalated 26.0% year over year to $35.4 million.
Investment advisory revenues, earned from the T. Rowe Price mutual funds distributed in the U.S. climbed 18% year over year to $613.4 million. Investment advisory revenues earned from other investment portfolios managed by the company increased 9.8% from the year-ago quarter to $241.9 million.
Total operating expenses climbed 12.2% year over year to $511.2 million in the quarter. The upsurge was mainly owing to high distribution and servicing costs, which grew 26% year over year, increased depreciation and amortization expenses, elevated compensation and related costs along with heightened other operating expenses.
These negatives were partially offset by reduced advertising and promotion costs. Notably, T. Rowe Price expects total advertising and promotion costs for 2014 to decrease 5%–10% year over year.
As of Jun 30, 2014, T. Rowe Price employed 5,749 associates, 5.4% higher than last year.
Assets Position
As of Jun 30, 2014, total AUM increased 6.6% to $738.4 billion from $692.4 billion as of Dec 31, 2013. During the reported quarter, market appreciation and income came in at $27.2 billion whereas net cash outflows were $0.2 billion.
T. Rowe Price remains debt-free with substantial liquidity, including cash and sponsored portfolio investment holdings of about $3.5 billion, which support the company’s ability to continue investing in the future periods. This compared favorably with $3.0 billion as of Dec 31, 2013.
Capital Deployment Activity
During first-half 2014, T. Rowe Price repurchased 726,000 shares of its common stock worth $57 million and invested $60 million in capitalized technology and facilities from available cash balances.
T. Rowe Price is expecting capital expenditures in 2014 to be approximately $150 million for property and equipment additions.
We believe that despite active competition, the company has significant long-term upside potential based on its disciplined risk-aware investment approach, which focuses on diversification, consistency in style 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, a relative mutual fund performance was a positive. However, higher operating expenses and stringent regulatory norms remain concerns.
Currently, shares of T. Rowe Price carry a Zacks Rank #2 (Buy). Among other investment managers, Ameriprise Financial, Inc. (AMP) is scheduled to report June quarter-end results on Jul 29, while Invesco Ltd. (IVZ) and Legg Mason Inc. (LM) on Jul 31.
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