The Rebound In M&A And Active ETFs Propel Dynamic Growth In Financial Advisory And Asset Management

Key Takeaways

• Lazard's expanding expertise and M&A activities in targeted sectors are set to drive Financial Advisory revenue and positively impact future earnings.
  
• Strategic growth in active ETFs and asset management is anticipated, supported by improved market conditions and leadership initiatives.
  
• Geopolitical risks, secular shifts to passive strategies, and tax rate fluctuations threaten Lazard's revenue, margins, and growth across varying markets and regions.

Catalysts

Operates as a financial advisory and asset management firm in North and South America, Europe, the Middle East, Asia, and Australia.

• The ongoing rebound in M&A activity, with market valuation multiples returning to their 10-year average, is expected to drive significant future growth in Lazard's Financial Advisory revenue.
  
• Increasing activities in the private equity sector, such as sponsor take-private activity and extended holding periods for PE-backed companies, present opportunities for Lazard to capitalize on M&A deals and capital raising, impacting future earnings positively.
  
• The firm's investments in recruiting and developing new talent, particularly in targeted sectors like healthcare and media, and expanding Lazard's expertise in areas like restructuring and liability management, are anticipated to support revenue growth and operational efficiency, thus potentially enhancing net margins.
  
• Lazard's push into the growing active ETF market, including recent leadership hires and product launches, aims to capture new business opportunities, which could lead to increased asset management revenue and boost earnings over time.
  
• The anticipated reduction in interest rates and improved outlook for global and emerging markets equities are expected to bolster demand for Lazard's asset management strategies, supporting revenue growth and potentially leading to higher net margins as market conditions improve.

Lazard Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lazard's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.2% today to 16.9% in 3 years time.
• Analysts expect earnings to reach $632.9 million (and earnings per share of $5.17) by about November 2027, up from $250.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.1x on those 2027 earnings, down from 19.8x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.6x.
• Analysts expect the number of shares outstanding to grow by 10.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.88%, as per the Simply Wall St company report.

Lazard Future Earnings Per Share Growth

Risks

• Geopolitical risks remain a significant consideration for business decisions, which could lead to increased uncertainty and impact client demand, affecting overall revenue and net margins.
  
• Secular headwinds affecting active asset management, including a shift towards passive strategies, could challenge the growth of Asset Management revenue and compress net margins.
  
• The potential for fluctuation in the effective tax rate due to the geographic mix of earnings can introduce volatility in net earnings and margins.
  
• Changes in global and emerging market conditions, particularly the divergence in macro trends between the U.S. and Europe, may impact M&A activity and advisory revenue differently across regions.
  
• A large, idiosyncratic outflow in Asset Management, driven by a client restructuring its assets into passive strategies, highlights the risk of additional similar cases that could decrease assets under management and impact revenue stability.

Valuation

• The analysts have a consensus price target of $58.12 for Lazard based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.7 billion, earnings will come to $632.9 million, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 7.9%.
• Given the current share price of $55.0, the analyst's price target of $58.12 is 5.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.