Summary
- Eaton Vance is a well-recognized financial services firm that specializes in wealth management, financial advisory, and investment products.
- The firm staged a solid recovery in the latest quarter, and appears to be getting back on track to growth.
- I see the shares as being undervalued at the moment, especially when considering the broader recovery of the equity market.
While the broader stock market has largely recovered since its March lows, it’s important to keep in mind that the composition of the different investment sectors has dramatically changed. Despite the recent weakness, the tech sector remains highly valued, with many names still trading at nosebleed valuations. In this article, I’m focused on Eaton Vance (EV), which belongs to the still beaten down financial services sector. I evaluate whether if it makes for an attractive investment; so let’s get started.
A Look Into Eaton Vance
Eaton Vance is a financial services firm that specializes in wealth management, financial advisory, and investment products. It was founded in 1924, and started with a single mutual fund, the Massachusetts Investors Trust. Today, it is a well-recognized firm with a wide range of offerings across the investment spectrum. Currently, it has $507 billion in assets under management (AUM), and last year, the company generated over $1.6 billion in total revenue.
Like for many financial services firms, COVID-19 has been a headwind and risk factor for Eaton Vance. This was demonstrated by the 10% decline in assets under management (AUM) that the company saw earlier this year, during Q2 (ended April 30th), due to a combination of asset outflows and the equity market decline. As seen below, Eaton Vance generates nearly half of its management fees from equity investments, making this an important investment sector for the company.
(Source: August Investor Presentation)
What’s encouraging, however, is that AUM staged a bounce-back in the latest quarter, Q3 (ended July 30th), representing a 9% sequential increase and a 5% YoY increase. While some of the increase is due to the equity market recovery during the company’s Q3, the firm also saw $2.7 billion in consolidated net investment inflows, which I view as being more important. As seen below, Eaton Vance has a solid track record of generating annual net investment inflows prior to the pandemic, and with the recent Q3 performance, net outflows has been bridged to just $0.5 billion on a YTD basis.
(Source: August Investor Presentation)
It should be noted, however, that the company’s 49% owned Hexavest subsidiary posted weak results, which led to a $0.90 per share write-down in its carrying value. This resulted in a GAAP loss of $0.01 per share for the latest quarter. While this business segment traditionally does well during down markets, due to its value-oriented strategy, this recent market downturn proved otherwise, as management reflected during the latest conference call:
