The stock of Eaton Vance (NYSE:EV, 30-year Financials) shows every sign of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $73.07 per share and the market cap of $8.6 billion, Eaton Vance stock shows every sign of being significantly overvalued. GF Value for Eaton Vance is shown in the chart below.
Because Eaton Vance is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 4.3% over the past three years and is estimated to grow 6.29% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Eaton Vance has a cash-to-debt ratio of 0.48, which which ranks worse than 72% of the companies in Asset Management industry. The overall financial strength of Eaton Vance is 5 out of 10, which indicates that the financial strength of Eaton Vance is fair. This is the debt and cash of Eaton Vance over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Eaton Vance has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $1.8 billion and earnings of $1.06 a share. Its operating margin of 18.06% in the middle range of the companies in Asset Management industry. Overall, GuruFocus ranks Eaton Vance's profitability as strong. This is the revenue and net income of Eaton Vance over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Eaton Vance is 4.3%, which ranks in the middle range of the companies in Asset Management industry. The 3-year average EBITDA growth rate is -5.8%, which ranks in the middle range of the companies in Asset Management industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Eaton Vance's return on invested capital is 8.34, and its cost of capital is 6.45. The historical ROIC vs WACC comparison of Eaton Vance is shown below:
In conclusion, the stock of Eaton Vance (NYSE:EV, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Asset Management industry. To learn more about Eaton Vance stock, you can check out its 30-year Financials here.
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