T. Rowe Price's profit up 10%

3rd-quarter earnings fail to meet forecasts

assets set record

October 26, 2006|By Laura Smitherman | Laura Smitherman,Sun reporter

T. Rowe Price Group Inc., a Baltimore investment management company, reported yesterday that profit rose 10 percent in the third quarter as the company benefited from a steady flow of client money into its mutual funds but was hurt by higher taxes.

The company's net income rose to $128 million, or 46 cents a share, from $116 million, or 43 cents a share, in the third quarter last year.

Earnings fell short of Wall Street expectations by 3 cents, according to a consensus of analysts polled by Thomson Financial. The higher taxes, stemming from adjustments by the company, reduced earnings by 3 cents a share.

T. Rowe Price stock, which has risen more than 30 percent in the past three months, fell $1.82, or 3.79 percent, to close at $46.23 on the Nasdaq stock market yesterday.

The soaring share price has raised analysts' concerns that there might not be much upside left in the stock, even though the company is expected to benefit from a new law that aims to encourage saving for retirement.

Matt Snowling, an analyst at Friedman Billings Ramsey, downgraded T. Rowe Price stock yesterday from a "buy" rating to "hold." He noted that Price traded at a 45 percent premium to the S&P 500 stock index, based on price-to-earnings ratios.

"Don't get me wrong. T. Rowe Price is one of the best-performing asset managers in the industry," Snowling said. "But the stock has been on such a tear, and I think you really need to see an acceleration of flows or a strong equity market to justify putting more money into the stock."

Price has avoided the client outflows of some competitors and reached a record $308 billion in assets under management, which rose $14.4 billion in the third quarter.

That increase included $4.2 billion in new cash from investors and $10.2 billion in higher market valuations and income.

Though money flowing into the company's mutual funds has slowed from previous quarters, partly because the summer is typically sluggish, analysts expect Price to capitalize on pension legislation recently passed by Congress.

The new law encourages automatic enrollment in 401(k) plans, potentially making investors of millions of workers who haven't signed up, and raises contribution limits.

Also, the Department of Labor recently proposed affording employers protection from liability for investment performance as long as automatically enrolled workers are defaulted into a balanced fund, a professionally managed account or a target-date retirement fund.

Price is one of the leading participants in the market for target-date, or life cycle, funds, which provide a single vehicle that shifts to a less-risky investment style as an employee nears retirement.

Investment advisory revenues in the quarter were up 17 percent to $375 million, and certain expenses also were up.

The company recognized a $15.6 million expense during the quarter to account for stock options under accounting procedures that the company adopted this year. Advertising and promotion expenses increased 13 percent, or $2.1 million.

With $1.2 billion in cash and liquid assets on its balance sheet, Price has been rumored to be among potential suitors angling to buy Putnam Investments or MFS Investment Management. Price Chairman George A. Roche said yesterday that the company has not "seriously considered" buying either Boston firm.

"We have said we are interested in purchasing assets but not in purchasing organizations, and those are both very large organizations," he said.

laura.smitherman@baltsun.com

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