Merrill equity analysts like AMG, but suggest selling Franklin, Eaton Vance, Gabelli

By Ronda Fears

Nashville, Tenn., Oct. 14 - Taking a more selective stance on asset managers, Merrill Lynch & Co. equity analysts now recommend selling Franklin Resources, Eaton Vance and Gabelli. But among their picks in the sector is Affiliated Managers Group.

"We are adopting a less constructive stance on the pure play asset managers owing to lackluster ROI [return on investment], building earnings risks versus consensus, and likely sustained choppy asset flows, particularly for retail-skewed players," said Merrill analysts Judah Kraushaar, William Katz and Sean Chin in a report.

"A double dip in the economy remains the chief risk." The analysts lowered their investment opinions on Franklin Resources, Eaton Vance and Gabelli Asset Management from neutral to sell.

While valuation is mostly at play, the analysts said there are residual scale and distribution issues for Eaton Vance and Gabelli Asset Management. They see those stocks falling 5% to 8% over the coming year.

"As part of our more selective stance on the group, we continue to generally favor higher quality names that can continue to deliver superior organic and EPA growth," the analysts said.

"Despite our increased cautiousness, we still see several compelling values, most notably Affiliated Managers Group, Federated Investors and Mellon Financial. We see approximately 40-70% ROI appeal over the coming year for these stocks."

In downgrading Franklin Resources, the analysts foresee rising risk to earnings per share and valuation as investors have discounted the firm's skewing toward value style investment and international flow rebound, and may be overestimating a margin snapback, given a spotty track record on cost control and persistent competitive pressures.

At Eaton Vance, the analysts said they think organic growth and margins are likely to remain under pressure near-term given the firm's overall tilt to the retail business, equities skewing and underlying product mix skewed toward exchange funds, bank loan funds and structured products.

Gabelli Asset Management's excellent long-term investment performance track record will take on greater relevance going forward, the analysts said, but they think investors have moderately overshot on their collective enthusiasm. They noted that Gabelli is trading at a 13% premium on forward year EPS despite the fact that 50% of its business is tethered toward retail equities where flows remain poor, uneven distribution and an atypical corporate structure.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.