Analyzing Eaton Vance's Top Sells

by: The Analyst Hub

Eaton Vance is an investment advisory and hedge fund management firm. The firm is a wholly owned subsidiary of Eaton Vance Corp [EVC]. The firm manages Eaton Vance series of mutual funds in addition to other funds. As of March 31, total equity AUM under its different schemes was $119 billion.

I discussed Eaton Vance's top buys in a previous article. In addition to buys, it is also interesting to have a look at top companies in which Eaton Vance is booking profits and selling its holdings. The following is a list of its top seven sells by market value in the last quarter, as released in the most recent 13F filing with the SEC.



Shares Held - 09/30/2011

Shares Held - 12/31/2011

Change in shares

Illinois Tool Works Inc.





Mcdonald's Corp.





Apache Corp.





Accenture Plc










PNC Financial Services Group Inc.





Wells Fargo & Company





I believe ConocoPhillips (COP) is a good sell among above stocks. However, I don't agree with Eaton Vance on Apache (APA) and McDonalds (MCD), and believe they are buys instead of sells.

ConocoPhillips is an integrated energy company. The company operates three segments, Exploration and Production, Midstream Services and Refining and Marketing business. In July 2011, COP announced its intent to separate its upstream and downstream businesses. The spin-off is expected to complete by Q2 2012. COP's PE multiple has expanded over the last few quarters in anticipation of the spin-off. I don't see any further chances of multiple appreciation from these levels.

In fact, once the spin-off completes, there can be a downside in the stock prices of individual entities, as COP shifts from an integrated energy business to pure play E&P business. E&P businesses are usually valued using cash flow multiples. COP's E&P assets seem less attractive than its pure-play peers, with an expected long term growth of 3-4%, which is well below the large cap E&P average of 8-9%. Also, COP's low organic free cash flow is likely to limit its ability for share buy-backs after its asset divestiture program is completed, and its dividend might be at risk as well.

Apache Corporation is an American energy company. It engages in exploration, development and production of natural gas, crude oil and natural gas liquids. Its core assets are in the United States, Canada, Egypt, the United Kingdom North Sea, Argentina and Western Australia.

I am bullish on APA due to its highly accretive acquisition of Cordillera Energy (CEP) for $2.85 billion. With this acquisition, APA has expanded its footprint by doubling its acreage in the liquid- rich Anadarko basin/Granite Wash play in Texas and Oklahoma. This also improves its asset mix, with more focus on liquids, which sell at a premium to natural gas. Due to improved economics of its acquired Granite Wash play, margins are expected to be higher.

Looking at the near term, the balance sheet looks strong, as 21% of the Cordillera deal will be financed by equity, and it is expected that CEP's assets will be self-funding from 2013 onwards. Going forward, APA expects to triple its production by 2015 by taking the rig count to over 40. The CEP acquisition has also presented APA with a strong drilling inventory of 2000 locations for the next few years, pointing to a steady long-term growth. From valuation point of view, the current levels reflect a lower trading multiple compared to its historical range and provide attractive risk reward proposition.

McDonald's Corp. and its franchisees and affiliates operate approximately 33,000 quick service restaurants that generate over $70 billion in annual system-wide sales. Roughly 43% of sales are generated domestically (US), with Europe (30% of revenue) and APMEA (19% of revenue) as the next largest markets. McDonald's has a scale and pricing power that few others possess in a rising cost environment.

In the US, the company plans to remodel 800 units in 2012, on top of the 600+ in 2011 whilst maintaining its strength in value positioning (particularly relative to food at home pricing, which has risen sharply, while McDonald's has taken up price more modestly). This, combined with operational focus on increasing peak throughput (dual drive-throughs, new POS), will have a positive impact on its US business. In Europe, the structural gap between McDonald's and peers is quite wide, and I believe high/low menu innovation and 950 remodels (vs. 1000 in FY11) should continue to strengthen company's presence in market space. The company expects 90% of its interiors and two-thirds of its exteriors to be re-imaged in Europe by the end of 2012, up from 75% and 40% today, respectively. In APMEA, value breakfast/lunch continue to resonate with consumers, especially in China, where focus remains for unit development including 225-250 for 2012, and an implied acceleration to 300+ in 2013, as the company targets 2,000 units by 2013 from 1,400 today.

Going forward, McDonald's is likely to continue driving solid same store sales through the combination of pricing, product innovation, remodels and compelling value offerings. McDonald's has a long-established history of annual dividend increases. The business is performing well across the globe, and the company's competitive position is getting stronger as it gains share. Earnings visibility remains above average, with potential upside as McDonald's gets more aggressive taking price. I believe it makes sense to buy the stock given the company's sales leadership position, market share gains and earnings visibility.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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