T. Rowe Price Group, Inc. (TROW) reported its third-quarter 2014 net income of $1.12 per share, lagging the Zacks Consensus Estimate by 3 cents. However, this compared favorably with the year-ago earnings of $1.00 per share.
Elevated operating expenses were on the downside. However, top-line growth and improved assets under management (AUM) were positives.
Net income came in at $303.6 million compared with $270.3 million in the prior-year quarter.
Performance in Detail
In the third quarter, net revenue increased 15.4% to $1.02 billion from $884.4 million in the year-ago period. The rise was primarily due to an increase in investment advisory fees that jumped 15.9% year over year to $890.7 million. However, net revenue was almost in line with the Zacks Consensus Estimate.
Administrative fees also increased 8.5% year over year to $92.7 million. Distribution and servicing fees escalated 22.6% year over year to $37.4 million.
Investment advisory revenues, earned from the T. Rowe Price mutual funds distributed in the U.S. climbed 19% year over year to $641.6 million. Investment advisory revenues earned from other investment portfolios managed by the company increased 9.7% from the year-ago quarter to $249.1 million.
Total operating expenses climbed 16.1% year over year to $532.1 million in the quarter. The upsurge was mainly owing to high distribution and servicing costs, which grew 22.6% 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 10% year over year.
As of Sep 30, 2014, T. Rowe Price employed 5,824 associates, 4.9% higher than last year.
Assets Position
As of Sep 30, 2014, total AUM increased 5.6% to $731.2 billion from $692.4 billion as of Dec 31, 2013. During the reported quarter, market depreciation, net of income came in at $7.4 billion whereas net cash inflows were $0.2 billion.
T. Rowe Price remains debt-free with substantial liquidity, including cash and sponsored portfolio investment holdings of about $3.6 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 third-quarter 2014, T. Rowe Price repurchased 3.2 million shares of its common stock and invested $83 million year-to-date in capitalized technology and facilities from available cash balances.
T. Rowe Price is expecting capital expenditures in 2014 to be approximately $130 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 #4 (Sell).
Among other investment managers, Ameriprise Financial, Inc. (AMP) is scheduled to report September quarter-end results on Oct 28, Invesco Ltd. (IVZ) on Oct 30 and Legg Mason Inc. (LM) on Oct 31.
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