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.