Zacks_Analysts' Blog : T. Rowe Price Profit Soars - Analyst Blog

T. Rowe Price Group Inc.’s (TROW) fourth-quarter 2011 net income of 73 cents per share were above the Zacks Consensus Estimate by 4 cents. Moreover, earnings compared favorably to 72 cents reported in the prior-year quarter.

Higher-than-expected top-line growth, partially offset by higher operating expenses, cumulated in improved performance. Moreover, increased assets under management (AUM) were also positive for the quarter. Yet, net income available to common shareholders decreased 1.7% to $187.5 million from $190.8 million in the year-ago quarter.

For full year, net income available to common shareholders was $769.7 million or $2.92 per share, up from $669.4 million or $2.53 per share in the prior year. Moreover, full year earnings per share were also above the Zacks Consensus Estimate by 3 cents.

Performance in Detail

Net revenue increased 3.7% to $671.6 million from $647.5 million in the year-ago period. The upsurge was primarily due to an increase in investment advisory fees that jumped 1.8% year over year (y/y) to $570.5 million. Moreover, net revenue compared favorably with the Zacks Consensus Estimate of $660.0 million.

Administrative fees also increased 8.2% year over year to $80.3 million. Distribution and servicing fees climbed 66.9% y/y to $20.2 million.

For full year, net revenue was $2.7 billion, up 12.5% y/y. Moreover, revenue were modestly in line with the Zacks Consensus Estimate.

Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S., jumped 2% y/y to $391.2 million in the quarter. Investment advisory revenues earned from other investment portfolios managed by the company increased 0.4% from the year-ago quarter to $179.3 million.

Total operating expenses climbed 3.6% y/y to $378 million in the quarter. The increase was primarily attributable to high distribution and servicing costs (up 67% year over year), depreciation and amortization expense, and compensation and related costs.

As of December 31, 2011, T. Rowe Price employed 5,255 associates, up 4% y/y from 5,052 associates. Slightly higher advertising and promotion expenditures added to higher expenses in the quarter.

Assets Position

Total AUM increased to $489.5 billion as of December 31, 2011, up 7.9% compared with $453.5 billion as of September 30, 2011. Market appreciation and income of $34.9 billion and net cash inflows of $1.1 billion led to increase in AUM at the end of the reported quarter. Moreover, average AUM increased 4.6% y/y to $484.8 million in the fourth quarter of 2011.

T. Rowe Price remains debt-free with substantial liquidity, including cash and mutual fund investment holdings of about $1.7 billion, which supports the company’s ability to continue to invest in the future periods. As of December 31, 2011, the company had $948.4 million in operating cash flows, including $98.7 of stock-based compensation in 2011 compared with $732.8 million as of December 31, 2010.

During the year 2011, the company repurchased 8.7 million shares of its common stock for $479.7 million. Moreover, the firm invested $82.3 million in capitalized technology and facilities. T. Rowe Price is planning capital expenditures for the year 2012 to be approximately $100 million for property and equipment additions.

The closest competitor of T. Rowe price, Virtus Investment Partners Inc. (VRTS) is expected to report its fourth-quarter 2011 earnings on February 1, 2012.

Our Take

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. With a debt-free position, higher return on earnings and improving investor sentiment witnessed in 2011 as a whole, we believe fundamentals will continue to remain strong.

Furthermore, relative mutual fund performance was also positive. However, higher operating expenses and stringent regulatory norms could be causes of concern.

T. Rowe Price currently retains its Zacks #2 Rank, which translates to a short-term Buy rating. However, considering the fundamentals, we are maintaining a Neutral” recommendation on the stock.