Price's earnings rise 22% in 1Q

Increase attributed to investments in retirement funds

April 26, 2007|By Laura Smitherman | Laura Smitherman,Sun reporter

T. Rowe Price Group Inc. reported yesterday that first-quarter earnings rose 22 percent as investors piled more money into the Baltimore investment company's mutual funds, particularly its lineup of retirement funds.

Price's net income increased to $143 million, or 51 cents a share, from $117 million, or 42 cents a share, a year ago. The results fell 2 cents short of Wall Street expectations, according to a survey of analysts by Thomson Financial. The company does not give earnings guidance to analysts, as many firms do.

Total assets under management reached a record $350 billion, up $15.2 billion during the quarter. Of that increase, $9.6 billion came from investors and $5.6 billion came in market appreciation. Retirement funds, which adjust to become more conservative as the investor ages, saw an inflow of $2.8 billion, the largest quarterly take since the funds were launched five years ago.

James A.C. Kennedy, who took over as Price's chief executive officer this year, wasn't fazed by not hitting the earnings estimate.

"We don't think we missed earnings," Kennedy said. "It's a continuum. It's more of the same. The key from our perspective is that we focus on how we are doing for our clients, and that's a long-term game. We're not focused on the short-term results."

Wall Street appeared to take dimmer view of the earnings picture, and the stock slipped 70 cents, or 1.4 percent, to $50.55 on the Nasdaq stock market. The shares have climbed more than 20 percent over the last year and reached an all-time high on Tuesday of $51.45.

Kennedy said he has a "positive" outlook for financial markets, though he anticipates that the global economy will expand more slowly, and that U.S. corporate earnings will be less robust.

If markets do take a dive, how would Price continue to grow?

"We won't," Kennedy said.

"At some point, we won't have the tail winds of the markets; it will be more in our face," he said. "Luckily, we have a very strong capital base so we can continue to invest in our people and technology, but revenues may be down because the markets are down. Those days will come."

Some analysts warned that Price could stumble as baby boomers begin to retire and stop contributing to retirement accounts.

Concerns also have been raised about the company's ability to attract international clients, and whether a change of money managers at its top-selling Growth Stock fund could turn off some investors.

Michael Hecht, an analyst at Bank of America, which prohibits analysts from owning stocks they cover, said in a research note that money flowing into retirement plans might slow and that weak inflow from institutional clients might have been the result of lackluster performance overseas. Price's International Stock fund has lagged behind its benchmark in six of the past seven years.

Price is moving money manager Robert W. Smith to the International Stock fund, and in January started the Overseas Stock fund, which takes a different approach to picking stocks. In the reshuffling, Robert Bartolo will take over the Growth Stock fund, which garnered $2.3 billion in investor money during the quarter. Friedman Billings Ramsey analyst Matt Snowling said in a research note that the change could slow investment inflow.

Investors traditionally invest more during tax season, and Price ramped up its advertising spending by $3.8 million to pique interest in the first quarter. Price often promotes its record: More than two-thirds of its funds beat their peers when measured on a one-, three- and five-year basis.

As Price took on more clients, and more of their money, during the quarter, the company hired about 170 employees. Its largest expense, compensation and related costs, increased $24.2 million, or 15 percent, over the comparable period last year.

The company also plans $145 million in capital expenditures this year, which includes a new customer-service call center in Colorado Springs, Colo., and renovations to its headquarters in downtown Baltimore. It has no debt and $1.6 billion in cash and liquid investments.

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