T. Rowe Price Group Inc. (TROW) reported first quarter 2010 results on April 23, which fell short of the Zacks Consensus Estimate by 1 cent. However, results came in significantly above the prior-year quarter, driven by top-line growth and increased assets under management (AUM).
Nevertheless, following the earnings announcement, the response from analysts covering T. Rowe Price has been mixed. While some of the analysts made upward revisions on the back of the company’s strong fundamentals with a debt-free position and higher return on earnings, others have revised downward, as higher compensation costs and continued layoffs suggest lower optimism about the near-term growth prospects. Additionally, the relative mutual fund performance remains a cause for concern.
First Quarter Highlights
Though T. Rowe Price’s first quarter 2010 earnings of 57 cents per share were a penny behind the Zacks Consensus Estimate, results were significantly above the 19 cents reported in the prior-year quarter. This improvement was driven by better-than-expected top-line growth and higher AUM, partially offset by marginally higher operating expenses. Net income increased threefold to $153.0 million from $48.2 million in the first quarter of 2009.
T. Rowe Price remains debt-free with a substantial liquidity, including cash and mutual fund investment holdings of about $1.5 billion, which supports T. Rowe Price’s ability to continue investing in future periods. The company ended the reported quarter with $256.7 million in operating cash flows, compared with $139.4 million in the year-ago quarter.
(Read our full coverage on this earnings report: T. Rowe Price Profit Soars)
Agreement of Analysts
Analysts have had a mixed response to the earnings announcement, with a lack of any defined trend. Of the 20 analysts covering the stock, 8 raised their estimates for the upcoming quarter while 7 lowered theirs. For the following quarter, 9 analysts have upped their estimates while 5 lowered theirs over the last 30 days.
While analysts could not agree on the outlook of T. Rowe Price in the upcoming quarter and the following quarter, we find that they are somewhat optimistic about the company’s outlook in 2011. For full-year 2010, 11 analysts have raised their estimates while 6 lowered them. For full year 2011, 13 analysts have raised their estimates while only 1 analyst has revised downward.
Magnitude of Estimate Revisions
Estimates have not moved up significantly for the next two quarters following the first quarter earnings announcement, reflecting the lack of any near-term catalyst. However, for full year 2010, there is a modest upward movement in estimates, which upped to $2.61 per share from $2.57 per share. An expected improvement in its operating performances in 2011 led to a rise in 2011 estimates to $3.10 from $3.00 over the last 30 days.
Our Take
T. Rowe Price has delivered investment performance through a consistent approach — a balanced mix of business by product and distribution channel, and strong fundamentals that have set the company apart from its peers and differentiate it as a best-in-class asset manager. We feel the company warrants a premium multiple.
Although continued staff reductions and rising operating expenses suggest less buoyancy in the near term, the company has no balance sheet risk or financial leverage issues. However, the primary concerns posing a cautious near term outlook are the performance of mutual funds relative to peers and sustainability over the mutual fund market share over time.
However, in the long run, we believe that its strong track record in investment management and the changing demographics in the retirement market will continue to drive organic growth.
As evident from the earnings revision trends and their magnitudes, there is no clear directional pressure on the shares over the near term. This is reflected in the Zacks #3 Rank, which translates to a short-term Hold recommendation. Our long-term recommendation for the stock also remains at Neutral.
Read the full analyst report on “TROW”
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