On Nov 15, 2013, we downgraded our long-term recommendation on
T. Rowe Price Group, Inc.
) to Neutral from Outperform based on increasing expenses, which
depict undisciplined expense management. Moreover, stringent
regulatory norms remain concerns. However, with a debt-free
position, higher return on earnings, and improving investor
sentiment witnessed as a whole, we believe fundamentals will
Rationale behind Downgrade
Elevated operating expenses remain a major concern for T. Rowe
Price. Total operating expenses jumped 10% year over year in the
first nine months of 2013, mainly driven by higher compensation
and related expenses. Moreover, the company incurs significant
expenditures to attract new investment advisory clients and
additional investments from existing clients. These efforts
involve costs that generally precede future revenues, thereby
affecting the overall profitability of the company.
Further, at the current level, the asset management business is
under cyclical and secular pressures along with ongoing margin
pressures, many of which have been aggravated by the financial
crisis. These pressures include volatile markets and new
regulatory compliances. Though T. Rowe Price remains well
positioned over the long term, given short-term performance
hindrances and macro headwinds, a limited upside is expected in
the near term.
Related investment income has fluctuated significantly over the
years due to the performance of the company's corporate
investments, including the impact of market conditions and
interest rates and the size of its corporate money market and
longer-term mutual fund holdings. Thereby, based on the current
low interest-rate environment, fluctuations in other investment
income are expected to continue in the future, and thereby
affecting the top line of the company.
For T. Rowe Price, the Zacks Consensus Estimate for 2013 jumped
1.1% to $3.82 per share, over the last 30 days, as 11 out of 17
estimates moved north. For 2014, 4 out of 17 estimates trend
higher, pushing the Zacks Consensus Estimate by 0.2% to $4.21 per
share, over the same time frame. Hence, the company carries a
Zacks Rank #2 (Buy).
Other Major Companies to Consider
Some investment managers that are worth considering include
Artisan Partners Asset Management Inc.
Waddell & Reed Financial, Inc.
GAMCO Investors, Inc.
). All the companies carry a Zacks Rank #1 (Strong Buy).
ARTISAN PTNR AM (APAM): Free Stock Analysis
GAMCO INVESTORS (GBL): Free Stock Analysis
T ROWE PRICE (TROW): Free Stock Analysis
WADDELL&REED -A (WDR): Free Stock Analysis
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