Lazard (LAZ) falls squarely within our coverage areas with our recent focus on financial institutions. Although more diversified than a boutique like Moelis (MC), mainly due to the fact that Lazard also has an asset management business, we think that from a fundamental point of view, Lazard is quite well positioned. Asset management revenues, based on AUMs, tend to be less volatile across cycles than financial advisory businesses, which are typically related to mergers and acquisitions. In addition to asset management, Lazard has some compensation on the board thanks to some of its less cycle-sensitive specializations. With tapering coming in, it’s time to look at companies like PJT Partners (PJT) and Lazard within financials thanks to their resilience to cycles. Additionally, Lazard has stagnated in 2021 and is trading around pre-COVID levels despite significantly higher earnings with risk mitigators. The multiple looks low and Lazard could be a reasonable buy at these levels.
Q3 Quick View
The Q3 report tells us a lot of things that we would expect given the peer group. The financial advisory business is doing well. Revenues are up nearly 20% in this division. This is consistent with the fact that restructuring activity is subdued at the moment due to excess liquidity in the markets. Indeed, PJT, which focuses on restructuring, saw its revenues decline due to the decline in the underlying business. Growth in financial advisory comes primarily from pharma, fintech, and other high-growth, venture capital-focused businesses. This is where many companies are achieving advisory growth, including Goldman Sachs (GS), where these coverage areas have been the primary source of the strong performance.
Asset management was a bit of a surprise. Assets under management are at all-time highs at this point, growing in the peer group. While sequential growth has been moderate, in particular due to the outflow of equity strategies in favor of income and alternative strategies, the situation remains favorable, with sustained levels of assets under management, of course, on the basis of solid flows of recurring cash. In particular, Lazard is doing well in terms of performance, with 2/3 of the strategies outperforming the respective benchmarks.
Lazard compared to his peers
Lazard compares itself to its peers by being a happy medium between a franchise focused on restructuring and boutiques that focus on capitalizing on hot markets. The difference in growth rates really is proof of that. Moelis knocked it out of the park with triple-digit revenue growth rates. PJT, on the other hand, actually declined. Growth in financial advice sits somewhere in the middle for Lazard, reflecting that while they will capitalize on the liquidity-fueled boom, which will still last for some time given the intensity of capital markets with the expansion of capabilities needed to fight inflation, it also shows that they have countercyclical businesses waiting. Restructuring activity is a strong offset, along with the more specialized Lazard franchises that focus on public financing, which is also less sensitive to business activity, while also being supported by government initiatives to finance growth infrastructure and capacity. Additionally, half of Lazard’s revenue is in asset management. Although declines of 10-15% in assets under management are not uncommon in times of severe uncertainty, as we saw towards the end of the first quarter of 2020, activity tends to be much less volatile than financial advice.
By comparing their valuations on a simple PE basis, one gets an idea of how the market views this sector. PJT has the highest PE at around 15x, indicating that markets fully understand that restructuring could come back strong, especially in an adverse market scenario, while remaining strong in the current cash-fueled environment. lazard and Moelis both are trading at a similar valuation of around 10x on a PE basis. Moelis, while a superb institution and more than capable of restructuring, Lazard has a larger, more established vertical specifically designed for restructuring and has more revenue from sectors of the market that have been less dependent or less sensitive to the economic outlook, such as asset management. We believe Lazard is in a better position to defend earnings than Moelis, and likely deserves a slight premium over Moelis given the threat that discounting and inflation could pose to market activity.
Lazard is trading roughly at pre-COVID levels, even considering an overall return of around 10% paid over the past 2 years. Overall revenue is 20% higher than it was pre-COVID, which means the market is pricing in a pullback to some degree by keeping the price as it is. This is a good sign for Lazard investors, as some pessimism in the price will defend it against deeper declines. Moreover, it indicates that the markets could be a little too pessimistic. Although tapering and inflation are not a good combination for capital markets, a PE of 10x is weak, and compared to peers like Moelis there are explicit mitigators in the fundamental profile if the consequences of the inflation and tapering are leveled off relative to the market. We think this multiple is quite defensible, and being absolutely low gives investors a margin of safety. Furthermore, the 4.4% yield is attractive, especially since half of it comes from asset management, where the recurring cash flow basis is clearly less volatile under severe Marlet. Overall, we think Lazard is proving to be an attractive exposure at these prices.