By Zacks Equity Research

T. Rowe Price Group (TROW) on Wednesday reported third-quarter net income of 87 cents per share, topping the Zacks consensus estimate by 3 cents. Moreover, earnings compared favorably with 71 cents reported in the prior-year quarter.

Higher-than-expected​ top-line growth and increased assets under management were positives for the quarter. Yet elevated operating expenses were a dampener.

Net income including after-tax realized gains of $31.2 million from the sale of certain investments in sponsored mutual funds to seed sponsored portfolios in support of the company's distribution efforts outside the U.S., stood at $247.3 million or 94 cents per share.

Performance in detail

Net revenue increased 13.3% to $769.7 million from $679.4 million in the year-ago period. The upsurge was primarily due to an increase in investment advisory fees that rose 14.4% year over year to $661.4 million. Moreover, net revenue surpassed the Zacks consensus estimate of $766.0 million.

Administrative fees also increased 3.9% year-over-year to $83.4 million. Distribution and servicing fees climbed 19.0% year over year to $24.4 million. However, net revenue of savings bank subsidiary declined 16.7% year over year to $0.5 million.

Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S. jumped 15% year over year to $458.1 million. Investment advisory revenues earned from other investment portfolios managed by the company increased 12.8% from the year-ago quarter to $203.3 million.

Total operating expenses climbed 6.9% year-over-year to $410.8 million in the quarter. The increase was primarily attributable to high distribution and servicing costs (up 19.0% year-over-year), depreciation and amortization expense, and compensation and related costs. Lower advertising and promotion expenditures partially offset the increase. T. Rowe Price expects its advertising and promotion expenditures for the full year 2012 to be similar to 2011 levels.

As of September 30, 2012, T. Rowe Price employed 5,295 associates, up 1.4% year over year.

Assets position

Total assets under management increased to $574.4 billion as of September 30, 2012, up 6% from $541.7 billion as of June 30, 2012. Market appreciation and income of $28.4 billion and net cash inflows of $4.3 billion positively impacted assets under management in the reported quarter.

 
T. Rowe Price remains debt-free with substantial liquidity, including cash and mutual fund investment holdings of about $2.3 billion, which supports the company's ability to continue to invest in the future periods. As of September 30, 2012, the company had $861.0 million in operating cash flows, including $77.3 million of stock-based compensation in 2012.

During the nine months ended September 30, 2012, the company repurchased 2.3 million shares of its common stock for $135.2 million. Moreover, the firm invested $55.7 million in capitalized technology and facilities during the same time frame. T. Rowe Price is expecting capital expenditures for the year 2012 to be approximately $100 million for property and equipment additions.

Our view

T. Rowe Price's financial stability has the potential to take benefit from the growth opportunities in the domestic and global assets under management. With a debt-free position, higher return on earnings and improving investor sentiment witnessed as a whole, we believe fundamentals will continue to remain strong. Furthermore, relative mutual fund performance was also positive. However, higher operating expenses and stringent regulatory norms could be causes of concern.

Currently, shares of T. Rowe Price retain a Zacks #2 Rank, which translates to a short-term "buy" rating.

One of T. Rowe Price's peers, Invesco (IVZ) is expected to report its third quarter 2012 earnings results on November 1, 2012.

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