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Eaton Vance Gets Downgrade from Credit Suisse on Outflows

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Eaton Vance Gets Downgrade from Credit Suisse on Outflows

Boston-based asset manager Eaton Vance Corp (NYSE:EV) said fiscal third-quarter profits fell 25 percent to $50.2 million, or 43 cents per share, from $68.1 million, or 55 cents per share, a year earlier. Revenue declined 8.6 percent to $298.8 million from $327.1 million. Analysts were expecting a profit of 47 cents per share on revenue of $304.1 million.

In April, Valuewalk ran an article on Eaton Vance, a regularly dividend-paying company, and revealed that long-terms shareholders in the company had earned returns of 14.1 % per annum comprising both capital appreciation and dividends.

However, research, released by Credit Suisse Group AG (NYSE:CS),  after it posted its recent earnings report, assigns an Underperform rating to Eaton Vance, and a price target of $24.00.

The analysts cite weaker than expected earnings and continued outflows on a net basis. Though institutional flows remained positive, the firm’s Large Cap Value franchise faced heavy redemptions. The analysts also feel that fees including distribution and service fees could be pressured leading to lower EPS, and therefore target price.

On the other hand, research by Citi places Eaton Vance at a Neutral rating and a price target of $25.00.

Citi is appreciative of the solid improvement in volumes, but is concerned that these volumes are not accompanied by fee pricing strength. Also, Eaton Vance trades at a P/E premium to peers, such as Franklin Resources, Inc. (NYSE:BEN) and  Invesco Ltd. (NYSE:IVZ), and this could cap potential appreciation.

To put this in perspective, BlackRock, Inc.(NYSE:BLK), the largest money manager in the world, reported a 3% decline in its AUM during the second quarter, accompanied by an 18% fall in performance fees.

The The Blackstone Group L.P (NYSE:BX) declared net earnings that fell 74%, while EPS missed analysts’ expectations. However, the manager boosted AUM by 20% to $190 billion in an environment described by its chairman and chief executive as “miserable.”


Citi notes the following important point regarding the earnings call and release:

First, volumes have snapped back, and lead indicators appear to be generally improving. However, such volume is generally tipping toward fee rates that are either in-line or sharply below legacy fee rates, capping profit contribution and keeping alive challenges between growth and profitability. It seems to us, EV is willing to marginally sacrifice capacity and profitability to rev up the top line growth engine. Second, such volume versus margin dynamics are likely to call into question why investors are willing to apply a premium valuation to EV against key peers that are either generating better volumes and/or face less trade-off risks, we believe. Looking more broadly, the update from EV is particularly favorable for Affiliated Managers Group, Inc. (NYSE:AMG), in our view, and reinforces our bullishness on Invesco Ltd. (NYSE:IVZ), the latter trading at 1x P/E discount despite better net volume EPS impact.


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