Best Ideas From Q2 Buys by Eaton Vance Asset Management

by: Rash Menaria
Eaton Vance is an investment advisory and hedge fund management firm. The firm is a wholly-owned subsidiary of Eaton Vance Corp. ((EVC)) and manages over $100 bn in the Eaton Vance series of mutual funds in addition to other funds. The investment process is centered on fundamental analysis, which is carried out at the security level.
The following is a list of its top 10 buys by market value in the last quarter, as released in their most recent 13F filing with the SEC.
Shares Held - 03/31/2011
Shares Held - 06/30/2011
Covidien Plc
Comcast Corporation
Apple Inc.
Suntrust Banks, Inc.
PPL Corporation
Northrop Grumman Corporation
ACE Limited
Illinois Tool Works Inc.
Johnson & Johnson
My favorite long candidates among above stocks are Covidien, Comcast and Apple. Covidien reported very strong Q3 results on Tuesday. Covidien’s revenues were ahead of expectations by ~ $70mm and it reported ~ 20% earnings growth. Prior to earnings Covidien stock corrected ~9% from May 19 to July 25 mainly due to utilization fears. However, it appears that those concerns were misplaced given Covidien’s strong new product flow. The stock now trades at 12.3x 2012E EPS. I believe the stock is a good buy at current price levels. The next major catalyst for the stock will be 2012 guidance on September 8, which may surprise on the upside given strong business momentum.
Comcast appears to be another interesting buy. Comcast is trading at ~ 6.0x 2011E EV/EBITDA, which is at discount to its peers. Although 2Q is likely to be seasonally weak, I believe Comcast’s cable results will continue to lead the industry for the remainder of the year and there can be upside to 2011 and 2012 revenue/EBITDA estimates. Further, given Comcast’s strong cash flow profile, there is a good chance of substantially more share buyback in 2012 compared with 2011. I believe it’s a good time to buy Comcast given its attractive valuations, secular advantage in broadband, upside to consensus expectation and potential for a significant increase in shareholder returns in 2012.
Apple is another good buy of Eaton Vance. Although it has gained ~25% in one month, it is still trading at PE of 12.7x which is low for a company with an expected EPS growth rate of 17%. Apple posted strong quarterly results on July 19 with better than expected results in iPhones and iPads, in particular. Going forward, further upside could lie ahead with new product cycles in iPhones, Macs, and even iPads again.
One stock I don’t like from the above list is Illinois Tool Works. ITW was also the major buy of Eaton Vance last quarter. However, it didn’t prove a good buy and has declined 2.5% since March 31 and 5.1% since June 30. ITW is an early cycle stock and I don’t see a point in buying it at this stage in the recovery. Recently, ITW disappointed with its below expectation results and guidance. Management noted that growth rates were ~100bps lower than expected, and that it anticipates similar moderating demand levels in H2.
For other stocks, here are some of the specifics about their businesses including consensus sell side price target for their stocks.
SunTrust Banks, Inc. is a commercial banking organization. The company is a diversified financial services holding company whose businesses provide a range of financial services to consumer and corporate clients. SunTrust operates primarily within Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee, Virginia, and the District of Columbia. It has a median sell-side price target of $31 compared with the current market price of $25.57.
PPL Corporation is an energy and utility holding company. Through subsidiaries, PPL generates electricity from power plants in the northeastern, northwestern and southeastern the United States. It markets wholesale or retail energy primarily in northeastern and northwestern portions of the United States, delivering electricity to customers in Pennsylvania, Kentucky, Virginia and Tennessee. It also delivers natural gas in Kentucky. It has a median sell-side price target of $29 compared with the current market price of $28.50.
Northrop Grumman Corporation is an integrated enterprise consisting of businesses that cover the entire security spectrum, from undersea to outer space and into cyberspace. The company operates in four segments: Aerospace systems, electronic systems, information systems and technical services. It has a median sell-side price target of $70 compared with the current market price of $65.40.
ACE is a global insurance and reinsurance organization, serving the needs of commercial and individual customers in more than 170 countries. ACE operates in four business segments: Insurance-North American, insurance-overseas general, global reinsurance, and life. It has a median sell-side price target of $75 compared with the current market price of $65.88.
Johnson & Johnson is engaged in the research and development, manufacture and sale of a range of products in the health care field. The company’s operating companies are organized into three business segments: consumer, pharmaceutical and medical devices and diagnostics. It has a median sell-side price target of $72 compared with the current market price of $65.92.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.