Good Earnings for T. Rowe Price, Revs Upped - Analyst Blog

Riding on higher revenues, T. Rowe Price Group, Inc. TROW reported its fourth-quarter 2013 net income of $1.06 per share, beating the Zacks Consensus Estimate by 2 cents. Moreover, this significantly outperformed the year-ago earnings of 88 cents.

Shares of T. Rowe Price increased more than 2% in the pre-market session, indicating that investors have been bullish on the results. The price reaction during the trading session will give a better idea about whether T. Rowe Price has been able to meet expectations.

Better-than-expected results were driven by top-line growth, a strong capital position and improved assets under management (AUM). However, elevated operating expenses remain a matter of concern.

T. Rowe Price's net income came in at $287.7 million, surging 24% from the prior-year quarter income of $232.0 million. For full-year 2013, the company reported net income of $1.05 billion or $3.90 per share compared with the prior-year income of $878.1 million or $3.36 per share. Moreover, results outpaced the Zacks Consensus Estimate by 4 cents.

Performance in Detail

For full-year 2013, net revenue was $3.5 billion, up 16.7% year over year. The rise was primarily due to an increase in investment advisory fees. Net revenue was in line with the Zacks Consensus Estimate.

In the final quarter, net revenue increased 18% to $929.8 million from $787.3 million in the year-ago period. The rise was primarily due to an increase in investment advisory fees that jumped 20% year over year to $811.7 million. Moreover, net revenue outpaced the Zacks Consensus Estimate of $917.0 million.

Administrative fees also increased 2.4% year over year to $85.6 million. Distribution and servicing fees escalated 25.6% year over year to $32.4 million. However, net revenue of the savings bank subsidiary registered a sharp decline of 66.7% year over year to $0.1 million.

Investment advisory revenues, earned from the T. Rowe Price mutual funds distributed in the U.S. climbed 22% year over year to $574.8 million. Investment advisory revenues earned from other investment portfolios managed by the company increased 15.2% from the year-ago quarter to $236.9 million.

Total operating expenses climbed 14.9% year over year to $489.7 million in the quarter. The increase was primarily attributable to high distribution and servicing costs, which grew 25.6% year over year, increased depreciation and amortization expenses, elevated compensation and related costs along with heightened occupancy and facility costs.

As of Dec 31, 2013, T. Rowe Price employed 5,668 associates, 5.5% higher than last year.

Assets Position

As of Dec 31, 2013, total AUM increased 20% to $692.4 billion from $576.8 billion as of Dec 31, 2012. During the year 2013, market appreciation and income came in at $127.6 billion, partially offset by net cash outflows of $12.0 billion.

T. Rowe Price remains debt-free with substantial liquidity, including cash and sponsored portfolio investment holdings of about $3.0 billion, which support the company's ability to continue investing in the future periods. This compared favorably with the prior-year figure of $2.0 billion. The company had $1.23 billion in operating cash flow for the year ended Dec 31, 2013, up 36.6% year over year.

Capital Deployment Activity

T. Rowe Price is expecting capital expenditures in 2014 to be approximately $145 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, 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 #2 (Buy). Among other investment managers, Invesco Ltd. IVZ is scheduled to report December quarter end results on Jan 30, Legg Mason Inc. LM on Jan 31 and Ameriprise Financial, Inc. AMP on Feb 4.

 
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