We are downgrading our recommendation to Neutral from Outperform
T. Rowe Price Group Inc.
), based on weaker-than-expected first-quarter 2012 earnings and
incompetent expense management. The company's first-quarter 2012
earnings lagged the Zacks Consensus Estimate, which is attributable
to higher operating expenses.
However, earnings compared favorably with the prior-year
quarter. Better-than-expected top-line growth and increased
assets under management (AUM) were positives for the quarter.
Marked by the economic recovery, U.S. equity markets ended
first-quarter 2012 with double-digit growth, driven by enhanced
investor optimism. Moreover, Federal Reserve is resolving
short-term issues to ensure continued U.S. economic recovery.
Therefore, with the significant revival of the economy, T. Rowe
Price is expected to post strong results in the coming
T. Rowe Price remains debt free with substantial liquidity
including cash and mutual fund investment holdings. This has helped
in strengthening the company's capital leverage and generating
return on earnings that is substantially higher than the industry
average. These growth drivers have paved the way for an
industry-leading dividend yield, thereby creating ample investor
confidence and scope for investment and growth opportunities in the
In February 2012, T. Rowe Price's Board of Directors approved a
10.0% hike in the company's quarterly common stock dividend. The
revised quarterly dividend now stands at 34 cents per share. This
marks T. Rowe's 26th consecutive year of dividend increase,
reflecting the company's commitment toward returning value to
shareholders with its strong cash generation capabilities.
With the recovery of the economic environment, AUM increased
$65.3 billion sequentially and ended the first-quarter at $554.8
billion. Net cash inflows from investors were $12.4 billion, with
market appreciation and income of $52.9 billion. Moreover, among
the company's peers,
) also reported a rise in AUM of $3.68 trillion as of March 31,
2012, up 5% sequentially and 1% year over year. The sequential
increase was due to strong inflows of $25.7 billion in long-term
On the flip side, operating margins are expected to be impacted
by the revenue environment with more risk to the downside in the
upcoming quarters, reflecting volatile AUM and continuing
reinvestment spending. Therefore, T. Rowe Price continues to focus
more on growing its products, expanding its third-party
distribution, and augmenting its non-U.S. investor base. Though
management is cautious regarding the control of other discretionary
expenses, elevated operating expenses would limit margin
T. Rowe Price has the potential to take advantage of the
economic recovery and benefit from the growth opportunities in the
domestic and global AUM. Yet, competitive pressures amid economic
headwinds remain as the major concerns.
T. Rowe Price currently retains a Zacks # 3 Rank, which
translates into a short-term 'Hold' rating.
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