T. Rowe Price Profit Soars - Analyst Blog

T. Rowe Price Group Inc.'s (TROW) fourth quarter 2010 earnings of 72 cents per share were significantly up from 57 cents reported 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. The quarter's earnings also outpaced the Zacks Consensus Estimate of 69 cents. 

Net income increased 25.6% to $191.6 million from $152.5 million in the year-ago quarter. 

For fiscal year 2010, T. Rowe Price reported net income of $2.53 per share, up from the Zacks Consensus Estimate of $2.49. Moreover, this compares favorably with $1.65 reported in the prior year. Net income came in at $672.2 million, significantly up from $433.6 million in the prior year.

In fiscal 2010, a pre-tax fourth-quarter charge of $16.4 million related to the contribution of certain sponsored money market funds of T. Rowe Price was made to offset the cumulative losses realized by those funds in past years were recognized.  The company also voluntarily waived $25.1 million of money market advisory fees to maintain a positive yield for fund investors and such fee waivers are expected to continue into 2011.

Performance in Detail

In the fourth quarter of 2010, net revenue increased 19.3% to $647.5 million from $542.6 million in the year-ago period. The upsurge was primarily due to an increase in investment advisory fees that jumped 21.4% year over year to $560.5 million. Administrative fees also increased 7.7% year over year to $86.3 million. Net revenue compared favorably with the Zacks Consensus Estimate of $640.0 million.

For full-year 2010, net revenue was $2,367.2 million, up 26.8% year over year, and also surpassed the Zacks Consensus Estimate of $2,360.0 million, attributed to higher investment advisory fees.

Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S., increased 20.0% year over year to $381.9 million in the quarter. Investment advisory revenues earned from other investment portfolios managed by the company increased 25.0% from the year-ago quarter to $178.6 million. 

Total operating expenses climbed 16.6% year over year to $364.7 million in the quarter. The increase was primarily attributable to high compensation and related costs (up 10.6% year over year), resulting from an increase in salaries, temporary employment costs and the accrual for the company's annual variable compensation program.

At the end of the reported quarter, the company employed 5,052 associates. Higher advertising and promotion expenditures and other operating expenses added to higher expenses in the quarter.

For fiscal year 2010, T. Rowe Price reported operating expenses of $1,330.7 million, up 14.1% year over year, attributed to higher compensation and related costs, advertising and promotion expenses, occupancy and facility costs and other operating expenses.

Assets Position

Total AUM increased to $482.0 billion as of December 31, 2010, up 23.2% compared with $391.3 billion as of December 31, 2009 and up 9.6% from $439.7 billion as of September 30, 2010. Market appreciation and an income of $35.4 billion and net cash inflows of $6.9 billion added to AUM at the end of the reported quarter. Average AUM increased 23% year over year to $463.7 million in the fourth quarter of 2010.
 
T. Rowe Price remains debt-free with substantial liquidity, including cash and mutual fund investment holdings of about $1.5 billion, which supports the company's ability to continue investing for the future periods. As of December 31, 2010, the company had $732.8 million in operating cash flows compared with $535.6 million as of December 31, 2009.

As of December 31, 2010, the company repurchased 5 million shares of its common stock for $240 million.

Guidance 

Based on its current strategic projects and plans, T. Rowe Price has estimated capital expenditures for fiscal 2011 to be approximately $120 million for property and equipment additions. These cash expenditures are expected to be funded from internal resources.

Our Take 

Nevertheless, fundamentals remain strong with a debt-free position, higher return on earnings and improving investor sentiment. Further, relative mutual fund performance was also positive and we believe that in the long run, the company's financial stability has the potential to take advantage of the gaining traction in the economy and benefit from the growth opportunities in the domestic and global AUM.

T. Rowe Price currently retains its Zacks #3 Rank, which translates to a short-term Hold rating. However, considering the fundamentals, we are maintaining an Outperform recommendation on the stock.