Company Reports

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.

Lazard has business exposures that add more uncertainty to its near-term outlook, but we believe this is already factored into its share price. Approximately 55% of Lazard’s net revenue is from acquisition and restructuring advisory with the remaining 45% coming from institutional asset management. Similar to many of its financial advisory peers, Lazard booked record revenue in 2021, and financial advisory revenue should normalize lower over the next couple of years before resuming a growth trend. Given its relatively high exposure to EMEA and Asia (about 40% of net revenue), investors in Lazard also have to pay more attention to developments in Europe and the potential for a prolonged European recession and a strengthening U.S. dollar. The company’s asset management business that specializes in global investing also gives it more exposure to international conditions and equity market prices than many of its financial advisory peers.

Lazard has bucked the negative trend of investment banking firms year to date and booked surprisingly strong earnings. The company reported net income to common shareholders of $106 million, or $1.06 per diluted share, on $727 million of net revenue. Adjusted revenue and earnings per share were 11.9% and 30.4% higher than the FactSet consensus estimates, respectively. That said, the company can't sidestep overall industry trends forever and while results should deteriorate we don't anticipate making a material change to our $51 per share fair value estimate for this narrow-moat-rated firm. We assess the shares as being undervalued.

While Lazard has business exposures that add more uncertainty to its near-term outlook, the firm does have a plan to close its revenue growth gap relative to financial advisory peers that could benefit it in the medium term. Approximately 55% of Lazard’s net revenue is from acquisition and restructuring advisory with the remaining 45% coming from institutional asset management. Additionally, the company is fairly global with about 60% of net revenue coming from the Americas and 40% from EMEA and Asia.

Pressure on Lazard’s earnings is likely to increase, but management is taking advantage of overly negative sentiment by repurchasing shares at value-accretive prices. Lazard reported net income to common shareholders of $95.5 million, or $0.92 per diluted share on $640 million of net revenue. Net revenue declined 29% from the previous year and 8% sequentially. For the first half of 2022, revenue on an adjusted basis only decreased 6% from the previous year, as financial advisory revenue has held up as the company works through its deal backlog from the second half of 2021. We expect to modestly decrease our fair value estimate for narrow-moat Lazard but believe our opinion will continue to be that shares are undervalued.

Narrow-moat Lazard reported fairly strong first-quarter results, but the economic backdrop is becoming increasingly uncertain and there will likely be downward pressure over the next year or so. The company reported net income to common shareholders of $114 million, or $1.05 per diluted share, on $695 million of net revenue. Net revenue increased 5% from the previous year, but it was lower than the net revenue in the second, third, and fourth quarter of 2021. We don’t anticipate making a material change to our $51 fair value estimate for Lazard and assess shares are undervalued.

While Lazard has business exposures that add more uncertainty to its near-term outlook, the firm does have a plan to close its revenue growth gap relative to financial advisory peers that could benefit it in the medium term. Approximately 55% of Lazard’s net revenue is from acquisition and restructuring advisory with the remaining 45% coming from institutional asset management. Additionally, the company is fairly global with about 60% of net revenue coming from the Americas and 40% from EMEA and Asia.

Given recent events, we decided to look at the exposure of some U.S.-listed investment banks to Europe. Potential causes of near-term turbulence include recession risk, higher commodity prices and inflation, central bank reactions, economic uncertainty weighing on investment banking deals, lower asset prices decreasing asset management revenue, and a greater dispersion in trading revenue. While we’ll be making some adjustments, we don’t expect to make material changes in our fair value estimates or economic moat ratings, as our long-term outlook remains largely unchanged. Lazard, Evercore, and Goldman Sachs are currently trading at material discounts to our fair value estimates.