We expect T. Rowe Price Group, Inc. (TROW) to beat earnings expectations when it reports fourth-quarter 2014 results before the opening bell on Wednesday, Jan 28.
Why a Likely Positive Surprise?
Our proven model shows that T. Rowe Price has the right combination of two key ingredients to beat earnings.
Positive Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +0.89%. This is a very meaningful and leading indicator of a likely positive earnings surprise for the company.
Zacks Rank #3 (Hold): Note that stocks with a Zacks Ranks #1 (Strong Buy), 2 (Buy) and 3 (Hold) have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of T. Rowe Price’s Zacks Rank #3 and ESP of +0.89% makes us confident of an earnings beat on Jan 28.
Factors to Drive Fourth-quarter Results
Though the overall market remained volatile during the quarter, major U.S. equity indexes witnessed an uptick that favorably impacted the investment management industry. The quarter witnessed a superior performance by asset management business and a still high investment banking transaction backlog. Thus, we believe T. Rowe Price has benefited from this favorable trend.
T. Rowe Price’s efforts to improve operating efficiency resulted in year-over-year growth in the top line in the prior quarter. We expect the upcoming results to show a similar trend, given the company’s strength in investment advisory, administrative and distribution. Further, expected improvement in AUM should significantly support its results.
On the other hand, the company’s inability to reduce expenses is a major concern. The past few quarters witnessed rising expenses. We do not expect this trend to reverse this time as well. Though the company did not indicate anything related to its cost control initiatives during the quarter, total advertising and promotion costs for 2014 are anticipated to decrease 10% year over year. Notably, T. Rowe Price is expecting capital expenditures in 2014 to be approximately $130 million for property and equipment additions.
However, activities of T. Rowe Price during the fourth quarter of the year were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained stable at $1.13 per share over the last 7 days.
Stocks That Warrant a Look
Here are some stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:
Ameriprise Financial, Inc. (AMP) has an earnings ESP of +0.45% and a Zacks Rank #3. It is slated to report results on Jan 28.
BOK Financial Corporation (BOKF) has an Earnings ESP of +0.94% and carries a Zacks Rank #3. It is scheduled to report results on Jan 28.
Lazard Ltd. (LAZ) has an Earnings ESP of +1.91% and carries a Zacks Rank #3. It is scheduled to report results on Feb 5.
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