Morningstar | Weak Top-Line Growth Affects Eaton Vance's Profitability in 1Q; No Change to $46 per Share FVE
There was little in narrow-moat Eaton Vance's fiscal first-quarter results that would alter our long-term view of the firm, and we are maintaining our $46 fair value estimate. The company closed out the January quarter with $444.7 billion in assets under management, up 1.2% sequentially but down 1.0% year over year. Net inflows of $1.5 billion were better than our expectations of $3.3 billion in outflows, with most of the difference coming from better flows from Eaton Vance's equity ($759 million in inflows) and fixed-income platforms ($3.2 billion in inflows) than we were forecasting.While average AUM was up 0.9% year over year to $437.4 billion during the first quarter, a 3.9% year-over-year decline in the company's effective fee rate to 32.1 basis points overall, due to ongoing fee compression and shifting product mix, left management fees down 3.1% year over year. With distribution and service fees declining at a mid-single-digit rate as well, the company reported a 3.3% overall decline in revenue compared with the prior year's first quarter. This is basically in line with our full-year forecast for fiscal 2019, which calls for a low- to mid-single-digit decline in Eaton Vance's top line.
As for profitability, first-quarter operating margins of 29.8% were 250 basis points lower than the prior year's period and 370 basis points lower than the fourth quarter of fiscal 2018, due primarily to the impact of lower revenue levels, as most expense line items were lower on an absolute basis during the period. While we've envisioned Eaton Vance's operating margins slipping down closer to the operating profitability of the firm's peer group on average over the past five to 10 years (which has been around 30%), we didn't expect its margins to get there so quickly. We will be taking a closer look at our near- and long-term profitability forecasts to ensure that we're not understating (overstating) the firm's fixed (variable) operating costs.
Eaton Vance is engaged in managing investment funds and providing investment management and advisory services to high-net-worth individuals and institutions. Through its investment affiliates, the company manages active equity, income, alternative and blended strategies across a range of investment styles and asset classes, including United States, global and international equities, floating-rate bank loans, municipal bonds, global income, high-yield and investment grade bonds, and mortgage-backed securities, as well as a range of systematic investment strategies, including systematic equity, systematic alternatives and managed options strategies.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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