Price has 24% leap in profit

Equity funds attracted $5.8 billion in 3rd quarter

`A good, conservative ... shop'

October 27, 2004|By Paul Adams | Paul Adams,SUN STAFF

Baltimore-based T. Rowe Price Group Inc. reported an increase of more than 24 percent in third-quarter profit yesterday as investors shrugged off slipping market returns and poured $5.8 billion into the company's equity funds.

Net income in the three months that ended Sept. 30 was $82.5 million, or 62 cents per diluted share, compared with $66.3 million, or 51 cents per share, in last year's quarter.

The company's payroll and advertising costs were 21 percent and 32 percent higher, respectively, than they were a year earlier as the company hired more workers and stepped up marketing.

The company's shares rose $1.91, or nearly 4 percent, to close at $52.39 in trading on the Nasdaq stock market yesterday.

Some analysts said they expected the company's growth in assets under management to slow as the market declined in the third quarter. But T. Rowe Price continues to draw funds away from competitors that have been hit by last year's mutual fund trading scandals.

"They haven't been implicated in the mutual funds scandal, and I think that has helped investors to rediscover them," said Rachel Barnard, a stock analyst with Chicago mutual fund research company Morningstar Inc. Among mutual fund companies, T. Rowe Price has the most funds ranked four stars or higher by Morningstar.

"They're a good, conservative equity shop," Barnard said.

T. Rowe Price said assets under management climbed 2.5 percent to a record $212 billion as of Sept. 30. Revenue climbed to $316 million, a 22 percent gain from revenue of $258 million in the corresponding period a year ago.

"The market obviously was not particularly good in the quarter, but the company had very good cash flows, and that helped offset it," said George A. Roche, the company's chairman and president.

Investment activity typically slows when the market is down, but investors pumped $2.8 billion into T. Rowe Price mutual funds and more than $3 billion in the company's other managed portfolios, the company said.

The Dow Jones industrial average fell below 10,000 during the quarter, and the Standard & Poor's 500 Index declined 2.3 percent.

T. Rowe Price's assets under management lost $600 million in value as the market declined, and its advertising costs rose to $12.95 million.

Revenue from investment advisory services climbed 24 percent in the quarter, to $49.5 million. The company said it hired more people to handle the workload. It has 4,000 employees, almost 7 percent more than at the beginning of the year.

"Where they surprised us was the compensation-related costs," said Tricia Meave, an analyst with Variant Research in Boca Raton, Fla. Meave, who doesn't own T. Rowe Price shares or do business with the company, projected compensation costs of $114 million for the quarter, $3 million short of the $117 million the company reported yesterday.

Without those higher costs factored in, the analyst projected earnings per share of 64 cents, 2 cents higher than actual earnings.

"They had a great quarter despite the miss," she said, noting the company's record assets under management. Variant has a "buy" rating on the stock.

Roche said the higher employee compensation costs are a result of the company's growth. He expects moderate growth in the economy, saying investors on the sidelines will jump back into the market after the presidential election.

Barnard, the Morningstar analyst, said T. Rowe Price's reputation as a solid performer has resulted in a premium price for its shares. She has a target price of $46, a little lower than yesterday's close of $52.39. She said the company remains a good investment but that its shares "are not a bargain." T. Rowe Price shares reached a 52-week high of $56.93 in March.

Meave said the premium price is worth paying because T. Rowe Price has a track record of strong performance and room to increase its earnings.

"It might seem high, but you also need to remember that their ability to maintain that premium is very high," she said.

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