T. Rowe Price Group, Inc. TROW reported disappointing third-quarter 2015 results with a negative earnings surprise of 7%. The company reported net income of $1.06 per share, lagging the Zacks Consensus Estimate of $1.14. Moreover, this compared unfavorably with the year-ago earnings of $1.12 per share.
Absence of prudent expense management, which led to elevated operating expenses, remains a concern along with decline in assets under management (AUM). However, top-line growth acted as a tailwind.
Net income came in at $277.1 million compared with $303.6 million in the prior-year quarter.
Performance in Detail
In the third quarter, net revenue increased 3% to $1.05 billion from $1.02 billion in the year-ago period. The rise was primarily due to elevated investment advisory fees that rose 4% year over year to $922.6 million. Net revenue was almost in line with the Zacks Consensus Estimate.
Distribution and servicing fees inched up 1.9% year over year to $38.1 million. However, administrative fees decreased 4.7% year over year to $88.3 million.
Investment advisory revenues, earned from the T. Rowe Price mutual funds distributed in the U.S. climbed 5% year over year to $670.8 million. Investment advisory revenues earned from other investment portfolios managed by the company increased 1% from the year-ago quarter to $251.8 million.
Total operating expenses climbed 11% year over year to $590.7 million in the quarter. The upsurge was mainly owing to elevated compensation and related costs, which grew 9.5% year over year. Moreover, other categories of expenses escalated.
Notably, T. Rowe Price expects total advertising and promotion costs for 2015 to increase about 5% year over year.
As of Sep 30, 2015, T. Rowe Price employed 5,908 associates, 3.9% higher than last year.
Assets Position
As of Sep 30, 2015, total AUM decreased 2.9% to $725.5 billion from $746.8 billion as of Dec 31, 2014. During the quarter, market depreciation, net of income came in at $46.8 billion whereas net cash outflows were $0.7 billion.
T. Rowe Price remains debt-free with substantial liquidity, including cash and sponsored portfolio investment holdings of about $3 billion, which support the company’s ability to continue investing in the future periods. This compared unfavorably with $3.4 billion as of Dec 31, 2014.
Capital Deployment Activity
During third-quarter 2015, T. Rowe Price repurchased 6.4 million shares of its common stock for $467 million.
T. Rowe Price is expecting capital expenditures in 2015 to be approximately $170 million for property and equipment additions, which includes $115 million already invested in technology and facilities in 2015.
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 the fundamentals will continue to remain strong.
Furthermore, a relatively better mutual fund performance was a positive. However, higher operating expenses, decline in AUM and stringent regulatory norms remain concerns.
Currently, shares of T. Rowe Price carry a Zacks Rank #4 (Sell).
Among other investment managers, Waddell & Reed Financial, Inc. WDR, Invesco Ltd. IVZ and Legg Mason Inc. LM are scheduled to release September quarter-end earnings results on Oct 27, Oct 29 and Oct 30, respectively.
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