Note:FLASH REPORT; more details to come, changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.
Reason for Report: FLASH UPDATE: 1Q18 Earnings
Prev. Ed.:4Q17 and 2017 Earnings Update, Feb 20, 2018.
Flash Update (earnings update to follow)
On Apr 26, 2018, T. Rowe Price Group announced 1Q18 results. Earnings per share of $1.77 lagged the Zacks Consensus Estimate of $1.78. Further, the bottom line improved 14.9% from the year-ago figure of $1.54.
First-quarter results reflect escalating expenses. However, higher revenues and assets under management (AUM) were the positive factors. Also, the company’s strong balance sheet position along with ample liquidity were the other tailwinds.
Net income for the quarter came in at $453.7 million compared with $385.9 million recorded in the prior-year quarter.
Revenues Increase, Expenses Up
Net revenues of $1.33 billion topped the Zacks Consensus Estimate of $1.30 billion. Also, it rose 17.3% from the year-ago quarter. The rise primarily stemmed from higher investment advisory fees that increased 19.8% year over year to $1.19 billion.
Distribution and servicing fees declined nearly 1% to $138.8 million on a year-over-year basis.
Investment advisory revenues generated from the T. Rowe Price mutual funds, distributed in the United States, were up 16.1% year over year to $832.9 million. Investment advisory revenues generated from other investment portfolios, managed by the company, rose 29.4% from the prior-year quarter to $356.3 million.
Total operating expenses were up 21.8% year over year to $744.2 million in the quarter. The rise was mainly due to higher administrative, distributing and compensation expenses.
As of Mar 31, 2018, T. Rowe Price employed 6,878 associates, 8.2% higher than the prior year.
Strong Assets Position
As of Mar 31, 2018, total AUM climbed 22.2% year over year to $1.01 billion. During the quarter, net market appreciation and income came in at $11.8 billion while net cash inflow was $11.3 billion after client transfers.
T. Rowe Price remains debt free with substantial liquidity, including cash and investment in its products of about $4.4 billion as of Mar 31, 2018, which enables it to keep on investing.
Capital Deployment Activity
During the first quarter, T. Rowe Price repurchased 2.9 million shares of its common stock for $313.5 million.
The firm invested $36.7 million during the quarter in capitalized technology and facilities using available cash balances. It projects capital expenditures to be approximately $180 million in 2018, comprising two-thirds for technology development.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON TROW.
Executive Summary [Note: Only highlighted material has been changed.]
Founded in 1937, Baltimore-based T. Rowe PriceGroup Inc.is a global investment management organization with assets under management (AUM) of $991.1billion as of Dec 31, 2017.
Trend of Broker Opinions: Broker sentiment on the stock remains skewed toward aneutralstance, with 53.8% of the firms in the Digest group rating the stock neutral;30.8% rating it positive; while the remaining 15.4% rating the stock negative. Target prices provided by the firms range from a low of $84.00 to a high of $128.00 per share.The average came in at $110.89, implying an expectedreturn of 0.9%.
Chief Investment Considerations:
- Strong organic growth opportunities
- Solid AUM
- Well-built balance sheet and ample liquidity
- Ability to return capital to its shareholders
- Weakness in flows
Neutral or equivalent (Seven firms or 53.8%):These firms believe that a strong investment performance through a consistent approach, reasonable mix of business by product and distribution channel, and strong fundamentals, differentiate T. Rowe Price from its peers. Further, the company is well poised to continue growing organically in spite of the industry-wide soft flows, as its strong retirement plan distribution and the recognition of its target date funds are complementing its growing fixed-income presence. However, currently 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 include volatile global markets, increased distribution costs and regulatory compliances. Though the company has underperformed the market and peers due to issues in its institutional asset management business, these firms are of the opinion that valuation could be better in the near term, based on heightened demand for different investment alternatives.
Positive or equivalent outlook (Four firms or 30.8%):According to these firms, T. Rowe Price is one of the best-positioned asset managers in terms of achieving significant earnings growth. In the near term, the company is expected to drive organic growth through international expansion while maintaining its investment performance. Notably, the company announced a new consumer fund strategy around consumer staples and consumer discretionary companies, which are a part of ongoing product innovation. Further, the company is expected to benefit from the penetration of the advisory segment and a rise in target fund flows. The firms also expect the company to benefit from greater expense flexibility than its peers, as it has continued to invest in marketing, technology and personnel throughout the cycle. In addition, these firms believe that T. Rowe Price has flexibility to enhance shareholder value, given the excess free cash flow generated by its low cost, scalable and high-return business.
Negative or equivalent outlook (Two firms or 15.4%):According to the firm, T. Rowe Price has been dependent on its pool of target-date retirement funds for organic growth, which only caters to individual investors.Moreover, the company has been experiencing greater volatility of flows arising from its increased institutional client base and dependence on third-party vendors for distribution, which are relatively unreliable for growth of new assets.Further, the firm believes the company lags its peers due to a relatively smaller fixed income and international franchise.Also, muted exposure to alternative investments or passive management makes the stock less attractive.
February 20, 2018
Overview[Note: Only highlighted material has been changed.]
Founded in 1937 and headquartered in Baltimore, T. Rowe Price Group Inc. is a global investment management organization that provides a broad array of mutual funds, sub-advisory services and separate account management for individual and institutional investors, retirement plans, and financial intermediaries. The company went public in 1986 and the T. Rowe Price Group corporate holding company structure was established in 2000. Through its subsidiaries, the company manages separate client-focused equity, fixed income and balanced portfolios along with mutual funds. Its client base includes individual investors, defined contribution retirement plans, institutional investors and third-party distributors, among others.The company operates worldwide from the U.S., England, Argentina, Australia, Hong Kong, Japan and Singapore. As of Dec 31, 2017, the company employed 6,881associates.
In 2011, T. Rowe Price changed the presentation of consolidated statements of income. The company presented distribution and servicing fees earned from 12b-1 plans of the Advisor, R, and VIP II classes of sponsored mutual funds, previously included in administrative fees, as a separate line to enhance transparency of these fees.Further, investment income earned by savings bank subsidiary, previously presented on its own, is being reported as net of interest expense paid on savings bank deposits.The line was renamed net revenue of savings bank subsidiary.
The Investment Advisory (accounted for 90% of net revenues in 2017) segment earns fees for managing the investment portfolios that are computed using the value of AUM. Since investment advisory fees depend on the value and composition of AUM, fluctuations in the financial markets and the firm’s marketing efforts will have an impact on results.As of Dec 31, 2017, non-U.S. investment advisory clients constituted about 6% of AUM.
The Administrative Services (7%)segment provides advisory-related administrative services to price funds through its subsidiaries.Overall, it provides mutual fund transfer agency and shareholder services, mutual fund accounting services and participant accounting, plan administration and transfer agent services.Additionally, the company provides trustee services and other non-discretionary advisory planning services to fund shareholders and potential investors.
The Distribution and Servicing fees(3%)segment contains servicing fees earned from 12b-1 plans of the Advisor, R, and VIP II classes of sponsored mutual funds.
In 2014, T. Rowe Price had made a long-term strategic decision to change the delivery of certain administrative services, including fund accounting and other investment recordkeeping operations. In 2Q15, the company finalized an agreement with BNY Mellon to provide such services.As part of the agreement, about 220 associates are expected to become employees of BNY Mellon.Though the compensation and related costs as well as other operating expenses line items of consolidated income statement will be affected, T. Rowe Price does not expect the impact on future operating results to be material.
T. Rowe Price competes with brokerage and investment banking firms, insurance companies, banks and other financial institutions in all aspects of the business in every country in which it offers advisory services.The company also competes with other providers of investment advisory services, primarily based on the availability and objectives of the investment portfolios offered, investment performance and the scope and quality of investment advice, and other client services.With increased mergers and acquisitions (M&A) activity in the financial space, larger companies with a wider reach and greater capabilities intensify the competitive arena for T. Rowe Price.
In May 2017, T. Rowe Price, in order to provide additional high-yield investment opportunity to its clients and further strengthen the global fixed income franchise, acquired a new fund from Henderson Global Investors. Henderson Global Investors is the North American subsidiary of London-based Henderson Global Investors Inc.
More information is available at
The analysts identified the following factors for evaluating T. Rowe:
Key Positive Arguments / Key Negative ArgumentsFundamentals
- Diversified business model and strong brand.
- Strong and consistent investment track record.
- Poised to return value to shareholders through meaningful capital deployment.
- Positive operating leverage due to strong business volumes and asset growth.
- Well-positioned to drive earnings growth.
- Strong balance sheet with growing cash and investments, and no debt.
- Expected increase in revenues and investment management margin from the mix shift toward international growth funds.
- Secular growth in domestic and global AUM.
- Conservative capital management.
- Sensitive to fluctuations in market and composition ofAUM.
- Capacity constrained in both small and mid-cap funds.
The company operates on a calendar-year basis.
February 20, 2018
Long-Term Growth[Note: Only highlighted material has been changed.]
According to the firms, T. Rowe Price remains the premier franchise for shareholders, given the company’s strong position and brand name in the retirement market;its ability to continue expanding its platform in the thirdparty, institutional, and international channels; and its constant performance through market cycles.Further, the firms believe that owing to its strong balance sheet and diversified investment and distribution capabilities, the company does not have to fundamentally change its business model at the time of market risks.With continuous prudent management of the company as well as investment in key capabilities and talent, and by taking advantage of attractive business opportunities, T. Rowe Price is wellpositioned for growth in the future.
The firms’ long-term fundamental view on T. Rowe Price remains positive.They believe the company will experience an above-average organic growth with net inflows, backed by an advanced management team.Also, over the long term, a steady market share of target date funds will result in an increase in AUM.While the fundamentals remain strong relative to the industry, the firms believe additional upside will come from increase in market levels, coupled with an acceleration of solid flows.
Over the next five years, management foresees international growth and continued expansion in the U.S. intermediary channel with focus on increasing multi-asset solutions.
February 20, 2018
Target Price/Valuation [Note: Only highlighted material has been changed.]
Provided below is the summary of valuation and ratings as per Zacks Research Digest:
Rating DistributionPositive / 30.8%↑
Neutral / 53.8%
Negative / 15.4%↓
Average Target Price / $110.89↑
Maximum Upside from Current Price / 16.5%
Minimum Upside from Current Price / -23.6%
Upside from Current Price / 0.9%
Digest High / $128.00↑
Digest Low / $84.00↑
Number of Analysts with target prices/ Total / 9/13
Risks to the target prices include significant declines in global asset values, a slowdown in global economic activity, prolonged market weakness, and changes in the U.S. andforeign laws and regulations.
Recent Events[Note: Only highlighted material has been changed.]
On Feb 12, 2018, T. Rowe Price announced preliminary AUM of $1.05 trillion for January 2018. Results reflect 5.7% rise from $991 billion as of Dec 31, 2017. Client transfers from mutual funds to other portfolios of $3.7 billion were recorded in January 2018.
On Jan 30, 2018, T. Rowe Price announced 4Q17 and 2017 results. The company delivered a positive earnings surprise of 4.8% for fourth-quarter 2017. Adjusted earnings per share of $1.52 outpaced the Zacks Consensus Estimate of $1.45. Further, the bottom line improved 25.6% from the year-ago figure of $1.21.
The 4Q17 results reflect elevated revenues and assets under management (AUM). Also, the company’s strong balance sheet position, along with ample liquidity,was a tailwind. However, escalating expenses posed a concern.
After considering certain non-recurring items and impact of tax reform, net income for the reported quarter came in at $347.1 million or $1.37 per share compared with $379.8 million or $1.50 per share recorded in the prior-year quarter.
For full-year 2017, the company reported net income of $1.50 billion or $5.97 per share that compares favorably with $1.22 billion or $4.75 per share in the prior-year quarter. However, results lagged the Zacks Consensus Estimate of $6.06.
Revenue[Note: Only highlighted material has been changed.]
In 4Q17, the company reported net revenues of $1.29 billion, up 17.9% yearoveryear (y/y).The rise was primarily due to higher investment advisoryfees.For 2017, net revenues were $4.79 billion, up 13.5% y/y.
Revenue Components Details
Investment advisory feesjumped 19.6%y/y to $1.16billion in the quarter.
Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the United Statesincreased16.7% y/y to $817.9million.Investment advisory revenues earned from the other investment portfolios increased 27.1% y/y to$338.1million.
Administrative fees amounted to $92.1 million, up3.6%y/y.
Distribution and servicing fee revenuesincreased7% y/y to $38 million.
From an investment performance standpoint, 84% of T. Rowe Price mutual funds across the share classes outperformed the comparable Lipper averages on a total return basis for the three-year period,82% outperformed for the five-year period ended Dec 31, 2017,81% outperformed for the 10-year period and 72% outperformed for the one-year period.In addition, T. Rowe Price stock, bond and blended asset funds that ended the quarter with an overall rating of four or five stars from Morningstar, account for 88% of the company’s rated funds’ AUM.
Margins[Note: Only highlighted material has been changed.]
Operating expenses were $747.7million in 4Q17,up19.4% y/y.Reported expenses exclude certain non-recurring items. Including certain one-time items, expenses came in at $755.1 million, up 43% y/y.
For 2017, expenses were $2.72 billion, up 12.4% y/y. The rise was mainly attributed to market-driven expenses, and continued strategic spend and early successes of the company's investments. Including certain one-time items, expenses came in at $2.68 billion, up 7.8% y/y.
Compensation and related costs totaled $446.3 million, up 17% y/y, primarily due to additional headcount, increased interim accrual of the annual bonus to reward strong performance and higher benefits.
Advertising and promotion costs were $33.8 million, up 24.3% y/y.
T. Rowe Price increased its average staff size by 9% from4Q16 and employed 6,881associates as of Dec 31, 2017.
Net non-operating incomeincreasedsignificantly on a y/y basis to $102 million, driven primarily by higher investment income which resulted from the robust market performance in 2017.
The company's income-tax provision includes a non-recurring charge of $71.1 million, reflecting the estimated impact of the U.S. tax reform enacted on Dec 22, 2017.
Effective tax ratewas36.9%.
Outlook
Management projects the effective tax rate to be in the band of 24-27% in 2018.
In 2018, T. Rowe price expects operating expenses to lessen relative to 2017, even as growth in market-driven expenses and investments in the business continues. However, other events not currently planned or expected might impact the company's expense level in 2018.
Earnings Per Share[Note: Only highlighted material has been changed.]
T. Rowe Price reported 4Q17adjusted net income of $383.9million or $1.52per share compared with $304.7 million or $1.21 per share in 4Q16.The figure took into consideration adjustments relating to consolidated sponsored investment portfolios, the Dell appraisal rights matter, the supplemental savings plan, non-operating income and the non-recurring charge recognized in 2017 associated with the enactment of the U.S. tax reform. For 2017, adjusted net income was $1.36 billion or $5.43 per share compared with $1.15 billion or $4.49 per share in 2016.
On a GAAP basis, T. Rowe Price had reported net income of $347.1 million or $1.37 per share compared with $379.8 million or $1.50per share in 4Q16. For 2017, net income was $1.5 billion or $5.97 per share compared with $1.22 billion or $4.75 per share reported in 2016.
Outlook
Some firms raised the 2018EPS estimates to reflect benefits of market gains in 2017 and positives of the tax reform.