T. Rowe Price Group (TROW) second quarter 2010 earnings of 59 cents per share were significantly up from 38 cents per share reported in the prior-year quarter. Higher-than-expected top-line growth, partially offset by marginally lower assets under management (AUM) and higher operating expenses, cumulated in improved performance. However, the quarter’s earnings missed the Zacks Consensus Estimate of 60 cents by a penny.
Net income increased to $158.5 million from $100.0 million in the second quarter of 2009.
Behind the Headlines
Net revenue increased 30.6% to $577.4 million from $442.2 million in the year-ago period and 3.8% from $556.2 million in the prior quarter. The leap was primarily due to an increase in investment advisory fees that soared 37.0% year over year to $492.0 million.
Administrative fees also increased by 4.2% year over year to $84.7 million. However, net revenue was below the Zacks Consensus Estimate of $580.0 million. Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S., increased 38.0% year over year to $342.8 million. Investment advisory revenues earned from the other investment portfolios managed by the company increased 34.0% from the year-ago quarter to $149.2 million.
Total operating expenses increased 12.5% year over year to $324.3 million. The increase was primarily attributable to high compensation and related costs (up 7.7% year-over-year), resulting from a higher interim accrual for 2010 annual variable compensation program, employee benefits costs and other employment expenses. At the end of the reported quarter, the company employed 4,862 associates.
Total AUM increased to $391.1 billion as of June 30, 2010, down 0.1% compared with $391.3 billion as of December 31, 2009. Market depreciation, net of income of $33.0 billion, offset the net cash inflows of $5.1 billion, at the end of the reported quarter.
T. Rowe Price remains debt-free with substantial liquidity, including cash and mutual fund investment holdings of about $1.4 billion, which supports the company’s ability to continue investing for the future periods. The company ended the reported quarter with $452.2 million in operating cash flows, compared with $269.8 million in the year-ago quarter.
The management of T. Rowe Price reiterated its projection of an increase in operating expenses for 2010 as its estimated advertising and promotion expenditures could increase up to 30% from 2009 levels, while on a sequential comparison this expense is expected to remain flat for the third quarter of 2010. The company’s projection is based on market conditions and investors’ demand.
Moreover, the effective tax rate is estimated to be about 38.0% for 2010.
Nevertheless, fundamentals remain strong with a debt-free position, higher return on earnings and improving investors’ sentiment. Though relative mutual fund performance remains a cause for concern, 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 #5 Rank, which translates to a short-term Strong Sell rating. However, considering the fundamentals, we are maintaining a Neutral recommendation on the stock.
Since the announcement of the results, the share price of T. Rowe Price has increased by 4.9%.