T. Rowe Price Group Inc. (TROW) is scheduled to report its second-quarter 2011 results before the opening bell on Tuesday, July 26. The Zacks Consensus Estimate for the second quarter is 78 cents per share, representing an increase of about 31% from the year-ago quarter.
With a debt-free position, higher return on earnings and improving investor sentiment seen in the last quarter we believe fundamentals will continue to remain strong. Furthermore, relative mutual fund performance was also positive. However, the financial services industry is already heavily regulated and could be adversely affected by new laws or amendments in any of the jurisdictions in which T. Rowe Price operates.
Previous Quarter Performance
T. Rowe Price’s first-quarter 2011 earnings of 72 cents per share were significantly up from 57 cents in the prior-year quarter. Higher-than-expected top-line growth and higher assets under management (AUM), partially offset by higher operating expenses, cumulated in improved performance. However, the quarter’s earnings were below the Zacks Consensus Estimate of 75 cents. Net income increased 27.2% to $194.6 million from $153.0 million in the year-ago quarter.
Earnings Estimate Revisions – Overview
Prior to the results release, earnings estimate increased by a penny to 78 cents over the last 7 days. The increase in estimate indicates strength in the stock.
We will now look into the details of earnings estimate revisions to substantiate why investors should hold this stock.
Agreement of Analysts
Looking at the estimate revision trends, it is quite clear that analysts are in agreement with the positive second-quarter earnings outlook for T. Rowe Price. Of the 14 analysts covering the stock, one has edged up the estimate for the second quarter over the last 7 days, while no downward revision was witnessed.
Moreover, for FY11 and FY12, one of the analysts has increased the estimate over the last 7 days and one moved in the opposite direction. This indicates no clear directional pressure on the performance of the stock in the near term.
Magnitude of Estimate Revisions
The Zacks Consensus Estimate for the second quarter rose to operating earnings of 78 cents per share from 77 cents over the last 7 days. Moreover, estimates for FY11 remained stable at $3.15. For FY12, estimates inched up by a penny to $3.69.
The magnitude of estimate revisions explains why holding the stock at current level will be a good decision.
Earnings Surprise
T. Rowe Price’s performance has been volatile over the trailing four quarters with respect to earnings surprises. The average earnings surprise was a positive 1.75%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.
By and Large
In February 2011, the board of directors of T. Rowe Price approved a 15.0% hike in the company’s quarterly common stock dividend. The revised quarterly dividend now stands at 31 cents per share. This marks T. Rowe Price’s 25th consecutive year of dividend increase, reflecting the company’s commitment toward returning value to shareholders with its strong cash generation capabilities.
Furthermore, T. Rowe Price incurs significant expenditure to attract investment advisory clients and additional investments from its existing clients. These efforts often involve costs that precede any future revenues recognized from an AUM increase. Based on the current strategic projects and plans, T. Rowe Price has estimated 2011 capital expenditures to be nearly $110 million at the end of first quartert 2011 owing to property and equipment additions. These cash expenditures are expected to be funded by internal resources.
T. Rowe Price’s financial stability has the potential to take advantage of the improving economy and benefit from the growth opportunities in the domestic and global AUM. However, higher operating expenses and stringent regulatory norms could be causes of concerns.
Conclusion
The estimate revision trends and magnitude of revision reflect no clear directional pressure on the shares over the near term.
T. Rowe Price currently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Moreover, considering the company’s business model and fundamentals, we have a long-term “Neutral” recommendation on the stock.
The closest competitor of T. Rowe Price, Virtus Investment Partners, Inc. (VRTS) is expected to report its second-quarter 2011 earnings on August 2, 2011.
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