Driven by strong top-line performance, T. Rowe Price Group, Inc. (TROW) reported impressive fourth-quarter 2014 results with a positive earnings surprise of 4.4%. The company reported net income of $1.18 per share, beating the Zacks Consensus Estimate by 5 cents. Moreover, this compared favorably with the year-ago earnings of $1.06 per share.
Elevated operating expenses remain a concern. However, top-line growth and improved assets under management (AUM) were the positives.
Net income came in at $315.9 million compared with $287.7 million in the prior-year quarter.
For full-year 2014, the company reported net income of $1.23 billion or $4.55 per share compared with the prior-year income of $1.05 billion or $3.90 per share. Moreover, results outpaced the Zacks Consensus Estimate by 4 cents.
Performance in Detail
For full-year 2014, net revenue was $3.98 billion, up 14.4% year over year. The rise was primarily due to an increase in investment advisory and administrative fees. Moreover, net revenue surpassed the Zacks Consensus Estimate of $3.97 billion.
In the final quarter, net revenue increased 10% to $1.02 billion from $929.8 million in the year-ago period. The rise was primarily due to elevated investment advisory fees that jumped 9.9% year over year to $892.1 million. Further, net revenue outpaced the Zacks Consensus Estimate of $1.01 billion.
Administrative fees also increased 8.9% year over year to $93.2 million. Distribution and servicing fees escalated 14.5% year over year to $37.1 million.
Investment advisory revenues, earned from the T. Rowe Price mutual funds distributed in the U.S. climbed 11% year over year to $640 million. Investment advisory revenues earned from other investment portfolios managed by the company increased 6.4% from the year-ago quarter to $252.1 million.
Total operating expenses climbed 10.8% year over year to $542.4 million in the quarter. The upsurge was mainly owing to high distribution and servicing costs, which grew 14.5% 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 2015 to increase about 5% year over year, while costs for first-quarter 2015 are expected to remain at fourth-quarter 2014 level.
As of Dec 31, 2014, T. Rowe Price employed 5,870 associates, 3.8% higher than last year.
Assets Position
As of Dec 31, 2014, total AUM increased 7.9% to $746.8 billion from $692.4 billion as of Dec 31, 2013. During the year, market appreciation and income came in at $50.7 billion whereas net cash inflows were $3.7 billion.
T. Rowe Price remains debt-free with substantial liquidity, including cash and sponsored portfolio investment holdings of about $3.4 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 2014, T. Rowe Price repurchased 5.3 million shares of its common stock for $415.5 million and invested $126 million in capitalized technology and facilities from available cash balances. Notably, during fourth-quarter 2014, the company repurchased 1.4 million shares of its common stock at a cost of $108.2 million.
T. Rowe Price is expecting capital expenditures in 2015 to be approximately $175 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 relatively better 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 #3 (Hold).
Among other investment managers, Ameriprise Financial, Inc. (AMP) is scheduled to report December quarter-end results on Jan 28, Invesco Ltd. (IVZ) on Jan 29 and Legg Mason Inc. (LM) on Jan 30.
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