Lazard is a preeminent financial advisory and asset management firm founded in 1848. It has 42 offices in 27 countries and an extremely client-centered business, with a vast network of relationships at the highest levels of business and government.
And, while its last earnings call was mixed, beating on EPS by a few pennies (beat by three cents at 61 cents per share) and missing on Revenue by $3.35 million, the company presents a very interesting risk reward opportunity at the current valuation.
Risk
Net income has ballooned in the last ten years, while shareholders have had a bumpy ride. In fact, despite being more valuable in terms of book and earnings, the stock is trading at roughly the same intraday price. Worse still, the company recently recorded its third-consecutive year-over-year decline in earnings and revenue
2006
- Revenue: $1.5 billion
- Income: $93 million
- Dividends: $0.36
- Shares: 44 million
- Book: -13.87
2015
- Revenue: $2.35 billion
- Income: $986 million
- Dividends: $1.43
- Shares: 133 million
- Book: 8.89
Inside the company remains very hierarchical, with senior leadership dictating within a possibly oppressive/dictatorial culture reminiscent of the 80’s investment bank, and of course the 90 hour work weeks. If the industry shifts, Lazard may not keep up.
The stock trades at 7 times earnings, which will likely come in around the $3.23 mark this year, putting the real P/E at 12. This is still a far cry from its 5 year average of 30x.
Perhaps the biggest risk with LAZ is the loss of brand reputation within the investment banking community. If that happens, deal flow will dry up quickly.
Reward
Lazard is a top-tier advisory firm with global reach on M&A transactions. In fact, it advised 6 of the 10 largest transactions in 2015, helping boost those earnings north of $1 billion. The transactions that Lazard has been directly involved with include:
- Anheuser-Busch Inbev (BUD, Financial) and SABMiller (SAB, Financial)
- Dell (DELL, Financial) and EMC Corp (EMC)
- Dow Chemical (DOW, Financial) and DuPont (DFT, Financial)
- Energy Transfer Equity (ETE, Financial) and Williams Companies (WMB, Financial)
- Kraft Foods Group and HJ Heinz (KHC, Financial)
- Royal Dutch Shell (RDS.B, Financial) and BG Group (BG.)
From a clout standpoint, they carry a lot. There are several deals pending for Lazard, which are facing headway from the U.S. government - Aetna's (AET) $37 billion acquisition of Humana (HUM) and the $130 billion merger between Dow Chemical and DuPont. It is unclear what Lazard fees would be if the deals close, but they could boost EPS past $3. Slow corporate activity due to Brexit and European volatility will hurt EPS in the short term, but long-term, bigger and bigger deals will surface and Lazard will be at the forefront of a large portion of them.
If Lazard can continue to increase its asset management business while keeping the financial advisory side well fed with deal flow, there are good returns for investors going forward.
Its total AUM (assets under management) is north of $200 billion, which from a traditional standpoint is not large at all. Yet, it’s not a retail shop like JPMorgan (JPM, Financial) or Bank of America (BAC, Financial) that can collect a ton of assets from the masses. Lazard deals with the classes, and the classes tend to always keep a good chunk of money in assets. The asset management side is now 50% of the business, which should help AUM continue to grow, meaning more revenue and better earnings consistency.
The stock is off 18% on the year with analyst EPS estimates averaging $3.23. That still doesn’t count for deals that may close or come to the table in the last quarters of the year. While I don’t think that Lazard is the same bargain potential as Carlyle, at this price it could be worth owning. John Rogers (Trades, Portfolio) seems to think so, having a 5% stake in the company (2.45% of his AUM).
In Closing
I doubt that LAZ will be a high flying growth stock, but the 4% dividend payout will grow and in 20 years the company's business model will be the exact same as it is today. From that standpoint, I think it's a good long-term hold for many investors.
Disclosure: I have no positions in any of the companies mentioned in this article.
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