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High Revenues, Cost Control Aid Lazard (LAZ) Amid Net Outflows

Lazard Ltd. LAZ is well-poised for top-line growth, supported by astrong advisory business. Moreover, the company is diligently working on its cost-containment measures, which will improve bottom-line growth in the future.

However, increased dependence on advisory revenues, along with continued net outflows over the past months, is a major concern.

The Zacks Consensus Estimate for the company’s current-year earnings has been revised 6.2% upward over the past 30 days. This reflects that analysts are optimistic regarding its earnings growth potential. Thus, LAZ currently carries a Zacks Rank #3 (Hold).

In the past year, shares of the company have lost 17.6% compared with the industry’s fall of 19.5%.


Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research


Organic growth remains a key strength at Lazard, as reflected by its revenue growth trend. Revenues witnessed a compounded annual growth rate (CAGR) of 4.4% over the five-year period (2018-2021). Moreover, a huge chunk of private capital is being deployed alongside strategic capital, with the potential to continue driving merger and acquisition activities.

Based on the strong team of indigenous professionals in the Financial Advisory segment and the diversified assets under management (AUM) mix in the Asset Management segment, we believe that these segments will drive the company’s overall revenue growth in the long term.

Over the past years, Lazard has significantly increased its AUM balance. The company’s stable asset management business offers long-term revenue visibility and constantly drives its earnings. Hence, the focus on scaling this platform and enhancing LAZ’s competitive position on the back of investment in technology, distribution efforts, and the development of new and existing funds are strategic fits.

The company targets to maintain a compensation-to-operating revenue ratio over the cycle in the mid to high-50% range and an adjusted non-compensation expense-to-operating revenue ratio of 16-20%. It has been able to meet the target since 2012. Going forward, consistency in compensation and non-compensation expenses directed toward improving profitability, with minimal impacts on revenues, will likely boost the company’s operating margins.

The increased dependence on Financial Advisory revenues could affect the company’s financials in the near term, as advisory fees are usually paid upon the successful completion of a transaction. Any weakness in economic and global financial market conditions, and elevated uncertainty in the near term might hurt global merger and acquisition deal value and volumes, and other capital market activities, thereby, affecting growth in advisory fees in the near term.

Lazard has been witnessing a steady increase in net outflows for the past several years. In the last four years (ended 2021), net outflows saw a CAGR of 33.2% mainly due to outflows in equity asset class.  A challenging operating backdrop, highlighted by equity outflows in the emerging markets, is a hindrance for the near term.

The company has hiked its dividend in the past and has a share repurchase plan in place. However, its payout rate and debt/equity ratio seem unfavorable compared with the broader industry’s averages. These, along with volatile financial performance in the recent past, make us believe that its capital-deployment activities might not be sustainable.

Stocks Worth a Look

A couple of better-ranked stocks from the finance space are Capital Southwest CSWC and AssetMark Financial AMK.

The Zacks Consensus Estimate for Capital Southwest’s current fiscal-year earnings has moved 4.7% higher over the past 30 days. In the past month, its shares have rallied 5.1%. Currently, Capital Southwest carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

AssetMark Financial currently carries a Zacks Rank #2. Its earnings estimates for the current year have been revised 5.4% upward over the past 30 days. In the past month, its shares have rallied 28.4%.

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