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Arise o Lazard: Value Resurrected for Financial Advisors

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  • Founded in 1848 - Lazard provides financial advisory and asset management globally
  • It is a business of two halves - financial advisory (very competitive and revenues can be volatile) and asset management (competitive but revenues more stable)
  • Good growth in financial advisory driven by healthy M&A market. Current M&A activity represents 5.3% of Global Market Cap (average over past 15 years is 6.2%)
  • Consistent growth in average AUM over the previous 5 years of 42.70% whilst maintaining fee base
  • Big coup for Lazard to win the Warren Buffet deal with Heinz, 3G and Kraft.
  • Quarterly dividend increased by 16.67% to $ 0.35 a quarter (2.49% at current price)
  • The share price is trading at an all time high
  • However the investment bank has worked on some of the biggest deals this year which have not been booked yet. This is likely to boost the revenue numbers in the coming quarters.

Financial Advisory

The financial advisory business is very cut-throat and revenues can be volatile. Warren Buffett said recently in his annual letter to investors that investment bankers were "money shufflers" who "don't come cheap". It must be quite challenging to land a deal when you come with a reputation like that - especially with the ever-frugal Sage of Omaha.

Looking at the revenues from financial advisory you see the very lumpy nature of the deals:

Lazard_-_Financial_Advisory

However with the general uptick in the economy, the record low interest rates and corporate cash balances sitting at an all time high, there is every reason to believe that the M&A market has some way to run yet. Compare the current M&A percentage of Global Market Cap at 5.3% against the long-term average of 6.2% and it is probably fair to say that we are in the second half of this bull market - with some distance to go yet.

Only two periods in the past 15 years that have broken the average
1. The dotcom bubble in 2000
2. The final run up before the financial crash of 2008

Lazard_-_Advisory_Market_Opp

Asset Management

The asset management business is also very competitive however Lazard seem to have consistently delivered the returns that investors want.  This has meant that the Assets Under Management has consistently been growing. The revenue has also been consistent and stable. The management team have expressed a concern about the consolidation of major players in this space and what it will mean for the future of the industry.  The regulators are becoming more vigilant with the large players who could destabilise the market. Therefore we see it as advantageous that Lazard are a mid tier player.

Lazard_-_Asset_Management

 

The management team have kept quite a good lid on the operating costs which has resulted in the operating margin increasing to 25%. We believe that there is not much more the management team will be able to do to cut costs down further. We are expecting them to hold the line at an operating margin of 25%.

We are forecasting further growth of 9.88% this year and we still believe that leaves a lot of upside. The advisory work is going to accelerate as the bull market matures and large cap companies use their large cash piles to become increasingly acquisitive. 

STRIDE Scores

STRIDE scores for the business are looking good. For more info on how the scores work, take a look at the scores and ratings video.

The strength score is 88 and we can see from the balance sheet that they maintain a very healthy cash position and good liquidity. Their long term debt pile sits at $1.048 billion which is equal to 2.41 time their current earning. The ageing of the debt is very favourable with 50% due over 2 years and 50% due + 5 years.

The timing score is 70 showing that the price is rising. 

The returns score is 79 and we can see that this is reflected in the numbers with their ROA at 13.69% while ROE is 62.01%.

The intrinsic value score of 24 is a bit low and means that you are hitching your wagon to the company's future growth prospects.

The dividend score is 47 as the payout ratio has been historically quite high. When looking into this further this has been a deliberate flushing out of cash back to shareholders.

Earnings predictability is 63 - this shows the lumpy nature of 50% of their revenue and the impact that it has on your expected returns. 

Lazard_-_Scores

STRIDE Valuation

Our fair value sits at $63.95. We are seeking a discount of ~$16 / 26%, which we feel provides adequate safety for a good entry point. This makes the current share price a bit high to enter into this stock at the moment and we would suggest waiting for a market pull back before entering.

Lazard_-_Valuation

STRIDE Financials

The income statement shows continued growth from 2011.

Lazard_-_Income_Statement

The balance sheet demonstrates the flushing out of cash to shareholders in 2012 and 2013.

Lazard_-_Balance_Sheet

The cash flow shows that this year the company has retained a healthy percentage of cash in the business. This is also represented in the balance sheet.

Lazard_-_Cash_Flow

Conclusion

This company is on our watchlist and we are looking for a pull back in the share price before entering. We think that the concerns expressed in the market that companies will halt M&A during an extended period of low economic growth are overdone.

In fact we feel that the inverse is probably going to occur as large cap companies use their corporate cash balances to counter stiff market competition by purchasing competitors. This will be good news for a mid tier player like Lazard who has proven that it can snatch deals from under the noses of Goldman Sachs and JP Morgan.

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Topics: 3D Value Investing, Valuation

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