Lazard: Reading Between The Lines by Michael A. Gayed

Summary

• Lazard has been kayoed on the Day charts, and the analyst community too is not so gung-ho about it.
• The company has reduced employees and closed a few offices and is focusing on new strategies to cater to the fast evolving marketplace.
• It has set up a new team in the UK to take advantage of the pent-up M&A demand in Europe post Brexit.
• Looking for a helping hand in the market? Members of The Lead-Lag Report get exclusive ideas and guidance to navigate any climate. Get started today »

Every financial worry you want to banish and financial dream you want to achieve comes from taking tiny steps today that put you on a path toward your goals. - Suze Orman

Lazard (NYSE:LAZ) is a droopy performer that has disappointed on earnings and stock performance. It's faced downgrades from analysts before and after its Q3 2019 earnings call. After experiencing an 18% rally from Oct 2019, the stock has barely recovered above its trendline, and that's because U.S.-China tariffs have been postponed and the conservatives have won the UK elections, ending the uncertainty over Brexit.

It has two main business units - financial advisory and asset management. 54% of its revenues are from its financial advisory while the rest are from asset management. North America contributes 57% to its revenue.

Should an investor ignore Lazard because it is a non-performer, or is now the time to bottom-fish? Here's the analysis:

Reading Between the Lines of its Q3 2019 Earnings Call - And After

The company has launched a new team in UK to explore private growth equity and venture capital market and connect these with global investors because it feels there's a lot of pent-up demand in AUM business. However, Brexit's impact was not discussed during the call. Though the conservatives are back in the saddle in UK, we all know that a hard or flawed Brexit will have negative consequences - but this bit was not fleshed out in the call.

The company experienced net outflows from its emerging market strategies (funds), which it attributed to rebalancing and de-risking. However, emerging markets are on a tear and most EM ETFs are popping. It is a mystery why investors would move out of Lazard's EM strategies in such a scenario. In late Nov 2019 (post the earnings call), Monroe County Employees' Retirement fund management terminated Lazard Asset Management from its emerging markets portfolio.

The Q3 financial advisory revenue of $304 million was almost on par with last year's numbers. It was attributed to increasing competition. Given evolving fintech, new players, and constant disruptions that are seen in this space, competition can only increase going forward. The company's asset management business generated operating revenue of $283 million, down from Q3 2018. The AUM (Assets Under Management) declined 1% from Q2 2019. If competition increases, or worse, if a global slump sucks in businesses, Lazard will experience deeper cuts.

During the Q3 2019 quarter, 200 people were pink-slipped from its financial advisory, asset management and corporate functions. The company also folded up some sub-scale offices and investment strategies. It is now making new strategies for growth and estimates; however, they also say that it takes "five years for a strategy to be successful and not every strategy is successful." The unsaid is that Lazard's new strategies will take time to work, and there always is the risk of failure.

Though it was spelled out, the management team dodged a direct question about how a political change in the U.S. would impact the company's fortunes. Trump's tax cuts have benefited the company, and if these are rolled back because of a political change in 2020, then its performance would suffer some more, and its restructuring will take many years to deliver.

...Read the Full Article On Michael A. Gayed's Blog on Seeking Alpha

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Author Bio:

This article was written by Michael A. Gayed. An author on Seeking Alpha and founder of the Lead Lag Report.

Steem Account: @leadlagreport
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