Friday July 27, 2012
by equity analyst Kenneth Leon, S&P Capital IQ, The Outlook
Our latest Focus Stock is Lazard (LAZ), which carries S&P Capital IQ’s highest recommendation of 5-STARS, or strong buy.
With offices in 16 countries, Lazard is one of the world’s preeminent investment banks. We believe it is best positioned among the investment banking and brokerage group in areas such as investment advisory services, mergers and acquisitions (M&A), and restructurings.
We think Lazard has an interesting mix of businesses, with financial advisory contributing 51% of operating revenue in 2011, asset management 47%, and corporate 2%.
We also believe Lazard is well diversified geographically, with a significant portion of its operating revenue generated outside North America. The company has invested and expanded its global footprint to cover emerging markets, particularly in Asia Pacific.
Lazard’s growing asset management business offers high recurring fees and strong cash flow generation, in our view. More specifically, Lazard ranks highest among its peers for the portion of revenue coming from investment banking advisory and underwriting services.
The company also has the highest portion of its peers for revenue from asset management services. Asset management is a stable and growing business, in our view, and we see single-digit growth ahead.
We believe that mergers and acquisition transactions will begin to improve in the second half of 2012 and going into 2013. The M&A market for the industry had been weak in 2011 and in the first half of 2012.
Nonetheless, we believe M&A activity will begin to pick up, with increased cross-border activity from foreign corporate or sovereign buyers active in the U.S. market and U.S. multinationals sitting on large cash holdings outside the U.S.
M&A advisory fee revenues in the 2012 first quarter declined for the industry, but were up for Lazard, both year over year and sequentially. We view this as impressive.
We project earnings per share of $1.50 in 2012, rising to $2.30 in 2013, driven by a rebound in the M&A market for investment advisory services, revenue growth from the asset management unit, the compensation ratio coming down as a percentage of total net revenues, and improved cost controls.
Our 12-month target price of $32 is based on applying a wider risk premium and a forward P/E of 14, the midpoint of its historical range and just above that of larger peers, to our 2013 EPS forecast of $2.30. Most investment bank boutiques trade at a higher multiple.
We caution that results for Lazard’s investment banking unit are often difficult to forecast, but the advisory pipeline is improving, in our view. Investment risks are tied to potential negative macro headline news flow.
Learn more about this financial newsletter at Standard & Poor's The Outlook.