Lazard Earnings: Management Cutting Costs as Economic Outlook Weakens

Lazard’s LAZ management announced a cost-savings initiative to deal with the weak economic outlook. The company reported a net loss to common shareholders of $22 million, or $0.27 per share, on $542 million of net revenue. Besides one quarter in 2020 when COVID-19 started, this was the company’s lowest revenue quarter since 2016. Mergers and acquisitions activity is low, as Lazard and peers have worked through their M&A deal pipelines that were built before the economic uncertainty of 2022 and management mentioned that restructuring advisory seems to be more delayed in this cycle than in previous cycles. This sounds reasonable to us, as significant economic uncertainty has reduced deal activity, but the economy has actually still been fairly healthy for the previous year, which has kept companies from falling into financial distress. Advisory revenue came in softer than we were expecting and expenses higher, so we are reducing our fair value estimate to $45 from $50 for narrow-moat-rated Lazard.

We believe Lazard’s plans to reduce headcount and expenses around 10% are reasonable. It can take multiple quarters for merger deals to close and for Lazard to book the bulk of deal fees, so management has decent clarity on revenue for the next half year or so. Given the uncertain economic environment, merger announcements are also likely to remain tepid until interest rates fall from either a recession or an all-clear signal for the economy, which, in our opinion, means a sustained recovery in financial advisory fees won’t likely occur until 2024.

About 40% of Lazard’s business is asset management, which is holding up well enough, and most of the company’s debt isn’t due until 2025 or later, so the company can weather this rough patch in financial advisory revenue.