Lazard (LAZ) falls very much within our coverage areas with our recent focus on financial institutions. While 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 perspective, Lazard is quite well positioned. Asset management revenues, based on AUMs, tend to be less volatile through cycles compared to financial advisory activities, usually linked to M&A. In addition to asset management, Lazard has offsets within advisory thanks to some of its specialisations which are less cycle sensitive. With tapering incoming, it is time to look at companies like PJT Partners (PJT) and Lazard within financials thanks to their resistances to cycles. Moreover, Lazard has stalled in 2021 and is trading around pre-COVID levels despite substantially higher income with risk mitigants. The multiple appears low and Lazard could be a reasonable buy at these levels.
Quick Look At Q3
The Q3 report tells us much that we’d expect given the peer group. The financial advisory business is performing well. Revenues are up almost 20% in that division. This is consistent with the fact that restructuring activity is subdued right now due to excess liquidity in the markets. Indeed, PJT, which is restructuring focused, has seen pullbacks in revenues due to lower underlying activity. The growth in financial advisory is primarily coming from pharma, fintech and other high growth and venture-oriented activities. This is where many companies are achieving advisory growth, including Goldman Sachs (GS), where these coverage areas have been a chief source of the strong performance.
Asset management has somewhat surprised. AUMs are at record levels at this point, growing across the peer group. While sequential growth was muted, particularly from outflows from equity strategies in favour of income and alternative strategies, the situation still remains favourable, with sustained high levels of AUM of course forming the basis for strong recurring cash flows. In particular, Lazard is doing well performance wise, with 2/3 of strategies outperforming respective benchmarks.
Lazard Compared To Peers
Lazard stacks up to peers by being a middle ground between a restructuring focused franchise and boutiques that focus on capitalising on hot markets. The difference in growth rates really evidence this. Moelis has been knocking it out of the park with triple digit growth rates in revenues. PJT, on the other hand, has actually declined. Financial advisory growth meets somewhere in the middle for Lazard, reflecting that while they will capitalise on the liquidity fueled boom, which will still last a while given how much intensity there will be in capital markets with capacity expansion needed to tackle inflation, it also shows that they have countercyclical businesses lying in waiting. The restructuring business is a strong offset, as well as the more specialised Lazard franchises that focus on government financing, which is also less sensitive to corporate activity, while also being supported by government initiatives to fund infrastructure and capacity growth. Moreover, half of Lazard’s revenues is in asset management. While 10-15% AUM declines are not uncommon in times of serious uncertainty, as we saw towards the end of Q1 2020, the business tends to be much less volatile than financial advisory.
Comparing their valuations on a simple PE basis, we get an idea of how the market is considering this sector. PJT has the highest PE at around 15x, which indicates that markets fully understand that restructuring could stage a comeback especially in an adverse market scenario, while also holding strong in the current liquidity fueled environment. Lazard and Moelis both trade at similar valuation of around 10x on a PE basis. Moelis, while it is a superb institution and is more than capable of doing restructuring, Lazard has a larger and more established vertical specifically conceived for restructuring and has more revenue coming from areas of the market that have been less dependent, or are less sensitive, to the economic outlook, like asset management. We think that Lazard is better positioned to defend its income than Moelis is, and probably deserves a bit of a premium over Moelis given the threat that tapering and inflation could be for market activity.
Lazard is trading at around its pre-COVID levels, even considering around 10% comprehensive yield paid out over the last 2 years. Comprehensive revenues are 20% higher than they were pre-COVID, meaning the market is to some extent pricing in a pullback by keeping the price where it is. This is a good sign for Lazard investors, because some pessimism in the price will defend it from more pronounced declines. Moreover, it indicates that markets might be a little too pessimistic. While tapering and inflation are not a good combination for capital markets, a 10x PE is low, and compared to peers like Moelis, there are explicit mitigants in the fundamental profile if the consequences of inflation and tapering are levelled against the market. We think this multiple is quite defensible, and being absolutely low offers investors a margin of safety. Furthermore, the 4.4% yield is attractive especially considering half of it is derived from asset management, where the basis for recurring cash flows is demonstrably less volatile under serious market duress. Overall, we think that Lazard proves itself to be an attractive exposure at these prices.