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T. Rowe Price (TROW) Posts Strong Q1 Earnings; Costs Rise

T. Rowe Price Group, Inc. TROW reported impressive first-quarter 2016 results with reported net income of $1.15 per share outpacing the Zacks Consensus Estimate of $1.02. Moreover, the reported figure increased from the year-ago earnings of $1.13.

Notably, results included higher non-operating income which resulted from realized gains on investments and implementation of a new accounting guidance associated with the consolidation of certain sponsored investment portfolios.

Increase in assets under management (AUM) was a positive factor. However, decline in revenues and elevated operating expenses were a drag.

Net income came in at $295.2 million compared with $309.5 million in the prior-year quarter.
 

 

Performance in Detail

In the first quarter, net revenue fell 3% to $994.1 million from $1.03 billion in the year-ago quarter. The fall was primarily due to lower investment advisory fees that dipped 3% year over year to $870.8 million. Net revenue also lagged the Zacks Consensus Estimate of $1.01 billion.

Distribution and servicing fees declined 9.6% to $33.9 million. Further, administrative fees decreased 3.9% year over year to $89.4 million.

Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S. inched down 2% year over year to $632.1 million. Investment advisory revenues earned from other investment portfolios managed by the company decreased 5% from the year-ago quarter to $238.7 million.

Total operating expenses rose 6.2% year over year to $583.2 million in the quarter. The increase mainly stemmed from a 3% year-over-year increase in other operating expenses. Moreover, compensation and related costs also shot up.

T. Rowe Price expects total advertising and promotion costs to be at par with the 2015 level in 2016.

As of Mar 31, 2016, T. Rowe Price employed 6,061 associates, 2.5% higher than last year.

Assets

As of Mar 31, 2016, total AUM increased slightly to $764.6 billion from $763.1 billion as of Dec 31, 2015. During the quarter, market depreciation, net of income, came in at $3.6 billion, while net cash inflow was $5.1 billion after client transfers.

T. Rowe Price remains debt-free with substantial liquidity, including cash and sponsored portfolio investment holdings of about $3.1 billion, which support the company’s ability to keep investing in the future. The company sponsored portfolio investment holdings of $2.8 billion as of Dec 31, 2015.

Capital Deployment Activity

During first quarter, T. Rowe Price repurchased 3.1 million shares of its common stock for $206.7 million and invested $35.2 million in capitalized technology and facilities using available cash balance.

For 2016, the company expects capital expenditures to be approximately $180 million for property and equipment additions along with technology development.

We believe that despite stiff 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 growth opportunities in the domestic and global AUM. The company’s debt-free position, higher return on earnings and improvement in investor sentiment as a whole make us confident of its strong fundamentals. Furthermore, a relatively better mutual fund performance is a positive.

However, higher operating expenses, declining revenues and stringent regulatory norms raise concern.

Currently, T. Rowe Price carries a Zacks Rank #3 (Hold).

Among other investment managers, Franklin Resources, Inc. BEN, Invesco Ltd. IVZ and Legg Mason Inc. LM are scheduled to release March quarter-end earnings results on Apr 27, Apr 28 and Apr 29, respectively.

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T ROWE PRICE (TROW): Free Stock Analysis Report
 
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