T. Rowe Price Beats Earnings, Posts Higher Revs - Analyst Blog

Driven by strong top-line performance, T. Rowe Price Group, Inc. TROW reported its first-quarter 2014 net income of $1.05 per share, beating the Zacks Consensus Estimate by 3 cents. Moreover, this significantly outperformed the year-ago earnings of 91 cents.

Impressive results were driven by top-line growth, a strong capital position and improved assets under management (AUM). However, elevated operating expenses remain a headwind.

Including after-tax realized gains of $32.0 million or 7 cents per share related to the sale of certain T. Rowe Price's investments in sponsored funds, net income came in at $304.3 million or $1.12 per share.

Performance in Detail

In the first quarter, net revenue increased 17% to $954.6 million from $815.7 million in the year-ago period. The rise was primarily due to an increase in investment advisory fees that jumped 17.6% year over year to $826.4 million. Moreover, net revenue outpaced the Zacks Consensus Estimate of $941.0 million.

Administrative fees also increased 9.5% year over year to $94.5 million. Distribution and servicing fees escalated 28.6% year over year to $33.7 million.

Investment advisory revenues, earned from the T. Rowe Price mutual funds distributed in the U.S. climbed 20% year over year to $590.8 million. Investment advisory revenues earned from other investment portfolios managed by the company increased 11% from the year-ago quarter to $235.6 million.

Total operating expenses climbed 14.1% year over year to $505.5 million in the quarter. The upsurge was mainly attributable to high distribution and servicing costs, which grew 28.6% year over year, increased depreciation and amortization expenses, elevated compensation and related costs along with heightened occupancy and facility costs.

As of Mar 31, 2014, T. Rowe Price employed 5,692 associates, 5% higher than last year.

Assets Position

As of Mar 31, 2014, total AUM increased 2.7% to $711.4 billion from $692.4 billion as of Dec 31, 2013. During the reported quarter, market appreciation and income came in at $10.2 billion where as net cash inflows were $8.8 billion, which included $6.0 billion, originated in target-date retirement funds and trusts.

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. The company had $487.1 million in operating cash flow for the quarter ended Mar 31, 2014, up 6% year over year.

Capital Deployment Activity

During first-quarter 2014, T. Rowe Price repurchased 400,000 shares of its common stock worth $31.3 million and invested $25.4 million in capitalized technology and facilities from available cash balances.

T. Rowe Price is expecting capital expenditures in 2014 to be approximately $150 million for property and equipment additions.

We believe that despite active competition, the company has a 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 #3 (Hold). Among other investment managers, Ameriprise Financial, Inc. AMP is scheduled to report March quarter-end results on Apr 28, while Invesco Ltd. IVZ and Legg Mason Inc. LM on May 1.