Morningstar | Weak Top-Line Growth Continues to Affect Eaton Vance's Profitability; Lowered FVE to $43 per Share
We've lowered our fair value estimate for narrow-moat Eaton Vance to $43 per share from $46 after updating our assessments for assets under management, flows, revenue, and profitability after the firm released second-quarter results. Eaton Vance closed out the April quarter with $469.9 billion in AUM, up 5.7% sequentially and 6.8% year over year. Net inflows of $4.6 billion were slightly better than we expected, with most of the difference coming from somewhat better flows from Eaton Vance's equity, fixed-income, and exposure management platforms than we were forecasting.While average AUM was up 3.5% year over year to $456.2 billion during the second quarter, a 3.0% year-over-year decline in the company's effective fee rate to 31.8 basis points overall, due to ongoing fee compression and shifting product mix, left management fees up just 0.9% year over year. With distribution and service fees declining at a double-digit rate as well, the company reported a 0.2% overall decline in revenue compared with the prior year's quarter. The company's year-to-date top-line decline of 1.8% was in line with our expectations, albeit with the company likely to see a better back half to the year, given the sell-off in equities that started in the company's fiscal 2018 fourth quarter.
As for profitability, year-to-date operating margins of 30.3% were 190 basis points lower than the prior year's period, due primarily to the impact of lower revenue levels, with some expense lines like compensation and fund-related expenses seeing a slight uptick. While we had envisioned Eaton Vance's operating margins slipping down closer to the operating profitability we've seen from the firm's peer group on average the past five to 10 years (of around 30%), we didn't expect them to get there so quickly and have adjusted our valuation to reflect our lowered margin expectations in the near to medium term.
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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