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Lazard (LAZ) Shows Prudent Cost Management: Should You Hold?

Lazard (LAZ) is likely to benefit from solid revenue growth and cost-control measures. Yet, rising outflows and dependence on financial advisory revenues pose headwinds.

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This story originally appeared on Zacks

Lazard Ltd. LAZ is well poised to benefit from its organic growth, a diversified assets under management (AUM) mix and cost-management initiatives. However, heavy reliance on Financial Advisory revenues and continued net outflows over the last few quarters are major concerns.

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The company was able to impress analysts regarding its earnings growth potential. The Zacks Consensus Estimate for earnings has moved marginally north for both 2021 and 2022 in the past 30 days. The stock currently carries a Zacks Rank #3 (Hold).

Shares of the company have gained 3.1% over the past six months compared with the industry’s growth of 2.4%.

Zacks Investment ResearchImage Source: Zacks Investment Research

Lazard’s revenue growth story seems impressive. Though operating revenues declined in 2019 and 2020, the same witnessed a CAGR of 4.6% over the five-year period (2014-2018). The increasing trend continued in the first nine months of 2021.

The company will continue to benefit from a strong talent base in the Financial Advisory segment and a diversified AUM mix in the Asset Management segment. Also, its inorganic growth strategies will support top-line growth.

The company’s cost-saving efforts are also encouraging. In 2012, Lazard announced cost-reduction initiatives, the full impact of which was reflected in 2014. In 2016, 2017, 2018, 2019 and 2020, the company reported a GAAP-adjusted operating margin of 25%, 26.8%, 27.4%, 22.9% and 23.4%, respectively, against the targeted 25%. Expenses were stable in 2019 and declined in 2020. However, the first nine months of 2021 witnessed an increasing trend in the same. Nonetheless, consistency in compensation and non-compensation expenses directed toward improving profitability with a minimal impact on revenues will likely boost the company’s operating margins going forward.

However, increased dependence on Financial Advisory revenues (nearly 54% for the nine months ended September 2021) could adversely impact the company’s financials in the near term. This is because advisory fees are usually paid upon the successful completion of a transaction.

Lazard has been witnessing a steady increase in net outflows for the past several years. In the last three years (ended 2020), net outflows saw a CAGR of 52.3%, mainly due to outflows witnessed in equity asset class. Also, in the first nine months of 2021, the company reported a net outflow of $4.8 billion. Though Lazard’s investment strategies in the global and local markets in both equities and fixed income asset classes are likely to support AUM growth to some extent, a challenging operating backdrop, highlighted by equity outflows in the emerging markets, is a hindrance to the stock in the near term.

Stocks to Consider

KKR & Co.’s KKR current-year earnings have witnessed an upward estimate revision of 7.4% in the past 30 days. Additionally, the stock has jumped 38.2% over the past six months. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Franklin ResourcesBEN current-year earnings has been revised 2.6% upward over the past 30 days. Over the past six months, the stock has gained 3%. Currently, it carries a Zacks Rank #2 (Buy).

Ameriprise Financial AMP has witnessed a 2.3% upward revision in current-year earnings estimates over the past 30 days. Also, in six months’ time, shares of the company have risen 16.2%. It carries a Zacks Rank of 2 at present.



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