Company Reports

We’re dropping our coverage of Lazard. Morningstar provides research on approximately 1,500 publicly traded stocks, and we periodically revise our lists in response to client interest and changes in the business environment.

Lazard has recently invested in managing director headcount with an intention of doubling revenue by 2030, which we view as plausible. While it lags some of its peers in this regard, the combination of a potential inflection in growth prospects and a return to margin performance near historical levels renders the name more intriguing than in years past.

Narrow-moat-rated Lazard had strong results for 2024, and the environment still generally looks conducive to the company making progress with its growth strategy. The company reported net income to common shareholders of $280 million, or $2.68 per diluted share, on $3.05 billion of net revenue for the year. Net revenue increased by 21% from the previous year, and it was the company’s second-highest revenue year. Almost all the growth came from financial advisory, up 28% to $1.7 billion, with asset management only increasing 3% to $1.1 billion. We don’t expect to make a material change to our $49 fair value estimate for Lazard and assess shares are fairly valued.

We believe the election of Donald Trump as president and Republican control of the US Senate and House will be largely positive for capital markets and investment-services firms. We will adjust our valuation models as government policies solidify, but with a rally of over 10% for multiple capital markets companies after the election, we believe potential tailwinds have largely been incorporated into share prices. We view most capital markets and investment-services firms as fairly valued to slightly overvalued.

Lazard’s results are holding up fairly well, and management opened up the possibility that 2025 earnings could be stronger than expected. For the third quarter, the company reported net income to common shareholders of $108 million, or $1.02 per diluted share, on $785 million of net revenue. Net revenue included $114 million from the sale of an office building, and adjusted net revenue according to the company was $646 million with adjusted net income of $0.38 per share. The $646 million of adjusted net revenue was still strong, up 21% from a year ago, but was down 6% sequentially and down 13% from the first quarter of 2024. We don’t anticipate making a material change to our $49 fair value estimate for narrow-moat-rated Lazard; we assess the shares as fairly valued.

Lazard’s financial advisory revenue growth has underperformed peers for much of the previous decade, but this may change in the next several years. Lazard is a firm with over 175 years of history, and arguably its maturity contributed to its relatively slow growth. The company had around 150 managing directors in its advisory business in 2008 and didn’t exceed 160 managing directors until 2018, though recent headcount has been around 200. Many of its younger peers heavily invested in their advisory business since the 2008 financial crisis and benefitted from the long economic expansion and upcycle in acquisitions activity. Lazard’s management has stated an intention to increase its managing director headcount and double revenue by 2030. A stronger growth trend to its managing director headcount and revenue could eventually cause investors to revalue the company higher.

Lazard reported record first-half revenue and the macroeconomic environment is generally supportive of further growth. The company reported net income to common shareholders of $50 million, or $0.49 per diluted share, on $685 million of net revenue in the second quarter. Net revenue for the quarter grew 7% from the previous year and was down 10% from an unusually strong first quarter. For the first six months of 2024, the company reported net revenue of $1.45 billion that was 22% higher than the first six months of 2023. While we expect to increase our revenue forecast, we do not anticipate making a significant change to our $48 per share fair value estimate for narrow-moat Lazard. We assess shares are now fairly valued, after having rated shares as undervalued for much of the prior two and a half years.

Narrow-moat Lazard reported record first-quarter net revenue, but most investment banking management teams have had a cautiously optimistic tone in their outlook for merger advisory. Lazard reported net income to common shareholders of $38 million, or $0.35 per diluted share, on $765 million of net revenue. Financial advisory revenue was a first-quarter record at $447 million, while asset-management revenue was its highest since the first quarter of 2022. We don’t anticipate making a material change to our $48 fair value estimate. We assess the shares as moderately undervalued.

We are increasing our fair value estimate to $48 from $37.50 per share for narrow-moat-rated Lazard. Our fair value estimate equates to a forward price/adjusted earnings ratio of 15 times and an enterprise value/EBITDA ratio of 12.5 times. Of the $10.50 increase in our fair value estimate, approximately $1 was from earnings since our previous valuation update, $5 was from a change in our working capital assumption, $2.50 was from increasing our forecast operating margin by 1 percentage point, and the remainder was due to miscellaneous adjustments, such as higher assets under management after the increase in the stock market.

Lazard’s revenue will likely remain relatively depressed in 2024, as it takes time for corporate confidence to recover and merger deals to close. Approximately 55% of Lazard’s net revenue is from acquisition and restructuring advisory, with the remaining 45% coming from institutional asset management.

Lazard ended a tough 2023 on a strong note, with the company positioning itself for what it hopes is the start of a long runway of growth. Lazard reported fourth-quarter net income to common shareholders of $64 million, or $0.65 per diluted share, on $806 million of net revenue. We were encouraged to see a swing in market sentiment during the quarter, which left revenue for the period 41% higher than the average of the prior three quarters.

New Lazard CEO Peter Orszag aims to double revenue by 2030 and deliver average total shareholder returns of 10%-15% per year through 2030. Disclosed plans include hiring more managing directors, increasing employee productivity, improving asset-management distribution, acquiring emerging asset managers, and maintaining its historical operating margin. Advisory firms that hired aggressively in the past decade generally did well. However, the past decade benefited from low interest rates, while the next decade will likely have relatively higher interest rates and increased geopolitical uncertainty. For the moment, we're rather skeptical of revenue doubling. That said, our fair value estimate for the company is still $37.50, and we assess shares of narrow-moat Lazard as undervalued.

Lazard’s revenue will likely remain depressed into 2024, as it takes time for corporate confidence to recover and merger deals to close. Approximately 55% of Lazard’s net revenue is from acquisition and restructuring advisory, with the remaining 45% coming from institutional asset management.

Lazard is changing to a C-Corporation from a partnership, and new CEO Peter Orszag is trying to make Lazard into a growth company. Net income to common shareholders in the third quarter was $7 million, or $0.06 per diluted share, on $524 million of net revenue. Net revenue of $524 million was down 28% from the previous year, 19% from the previous quarter, and was the lowest net revenue quarter since 2016. The current environment is close to the worst it can be for Lazard’s financial advisory business, with economic uncertainties weighing on merger activity but the underlying economy holding up, so restructuring isn’t near prior peak activity. That said, many investment banking management teams are cautiously optimistic regarding activity in 2024 given relatively healthy economic indicators in the U.S. but increasing global macroeconomic uncertainties. Stability or a small decrease in interest rates in 2024 could also spur merger activity, while the still relatively high interest-rate level could increase restructuring activity. We don’t anticipate making a significant change to our $37 fair value estimate for narrow-moat-rated Lazard and assess shares as moderately undervalued.

The bulk of Lazard is in a rough part of its business cycle, but the company has prepared to weather it, and there are signs of the very early stages of a recovery. In the second quarter, Lazard reported a net loss to common shareholders of $124 million, or $1.41 per diluted share, on $642 million of net revenue. It had $147 million of charges in the quarter related to cost-saving initiatives; pro forma net income was $23 million, or $0.24 per diluted share. Net revenue increased 1% from a year ago and 27% from the previous quarter; however, it was still 7% lower than the 2022 quarterly average and 19% lower than the 2021 quarterly average. We don’t anticipate making a material change to our $45 fair value estimate for narrow-moat-rated Lazard and assess the shares as modestly undervalued.

Lazard’s 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.

Given the lack of corporate confidence and lack of merger activity, Lazard will likely experience a decent decline in revenue in 2023, and the company started an expense savings initiative to offset some of the profit decline. Approximately 55% of Lazard’s net revenue is from acquisition and restructuring advisory, with the remaining 45% coming from institutional asset management. Restructuring revenue will increase in a recession, but it won’t fully offset a decline in acquisition advisory revenue.

Similar to other investment banks and asset managers, we expect lackluster revenue growth with a good chance of a decline over the next two years due to the probability of a recession. Approximately 55% of Lazard’s net revenue is from acquisition and restructuring advisory, with the remaining 45% coming from institutional asset management. Restructuring revenue will increase in a recession, but it won’t fully offset a decline in acquisition advisory revenue.

Most of the issues that affected Silicon Valley Bank don’t apply to the wealth management firms and investment banks that we cover, so we don’t plan to make material changes to our fair value estimates or Morningstar Economic Moat Ratings for Morgan Stanley, Goldman Sachs, Ameriprise Financial, Raymond James Financial, LPL Financial, Stifel Financial, Evercore Group, or Lazard.

Lazard’s revenue and earnings are likely to be relatively weak for several more quarters, but there should be a decent upturn after that. As we said after third-quarter results, Lazard’s outperformance in revenue and earnings in the first three quarters of 2022 couldn’t continue; indeed, for the fourth quarter, net revenue declined 28% from a year ago to $712 million, and net income to common shareholders dropped 80% to $42 million, or $0.44 per diluted share. For the full year, net revenue remained fairly resilient with a 13% decline to $2.77 billion, and net income fell 32% to $358 million, or $3.51 per share. We don’t anticipate making a material change to our $52 fair value estimate for narrow-moat Lazard. We maintain our assessment that the shares are undervalued, an opinion that we’ve held for much of the previous year, as we value companies based on through-the-cycle, long-term normalized earnings.