Yesterday, Goldman added Eaton Vance (EV) to its Americas Sell list, lowered estimates for the firm and shifted fellow asset manager Fortress Inv. (FIG) to Neutral. Goldman expect 2008 organic growth to decelerate from 17.8% rate to a 4% by mid-year. The firm expects the shares to revert to an in-line with peer group multiple, from a 25% premium. Close-end fund launches alone generated over 57% of EV's longterm asset growth during 2007 and that is not expected to be the case going forward. In the past Goldman has recommended firms with higher quality franchises and positive momentum [Black Rock (BLK), Och-Ziff (OZM), and Federated Investors (FII)]. The firm seems more undecided on Legg Mason's (LM) future (up 4% yesterday, mostly short-covering).
Our 1- year price target is $35 from $43, ~13% downside from current levels. We think EV shares will underperform given: (1) the impact of worsening economic conditions on EV's bank-loan NAVs and fund flows (EV is one of the largest buyers of leverage loans); (2) a lack of closed-end fund launches (which accounted for 50% of '08 flows) to augment Y/Y growth beyond F08; (3) over-reliance on large-cap value to drive equity flows (during a growth-investing cycle); and (4) valuation that does not fully discountslower net flow momentum. Our new $35 12-month DCF- based price target represents a P/E multiple in-line with historical levels and peers at 17x.
EV currently trades well above its historical 9% premium.
Risks U.S. Asset Managers proved a safe haven among the financials in 2007 and finished up 16% while the rest got clobbered -22%. Economists are now forecasting a recession. Expect to continue to view asset managers as "defensive financials", however, the group is not isolated from weak equity markets. The pursuit of overseas assets and the rise of non-traditional asset management are two main themes that may brighten up EV's future.