Decisive Expansions And Innovative Asset Management Propel Future Revenue Growth

Key Takeaways

• Expansion into Private Capital Advisory and strategic hires in sponsor coverage are set to enhance Lazard's advisory revenue and market share.
  
• Investment and strategic partnerships in Asset Management, including specialty products and expansion in Europe, aim at AUM growth and revenue diversification.
  
• Lazard faces multiple challenges including geopolitical risks, asset management issues, and the necessity for high investments impacting profitability and revenue stability.

Catalysts

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

• Expansion into Private Capital Advisory and restructuring has contributed to over a third of advisory revenue, positioning Lazard for future growth with the expectation that private capital and restructuring activities will continue to drive advisory revenues higher.
  
• Lazard’s strategic hire to expand sponsor coverage, particularly among private capital clients, should increase the firm's market share in advisory services, potentially enhancing both the volume of deals Lazard is involved in and its overall advisory revenue.
  
• Investment in Asset Management, particularly through the development of new specialty products like the U.S. small-cap equity fund and Global Listed Infrastructure Active ETF, aims to capture emerging market trends and investor preferences, which is expected to lead to higher management fees and AUM growth.
  
• The firm's efforts to evolve its Asset Management business through strategic partnerships, like the establishment of Lazard Elaia Capital in Europe, may lead to inorganic growth, expanding the firm’s reach and capabilities in Asset Management, thus leading to revenue diversification and growth.
  
• Anticipation of increased demand for Lazard’s core and specialty offerings in Asset Management as market conditions improve, particularly with lower interest rates and a broadening of the market rally, suggests potential for AUM growth and increased fee income.

Assumptions

• Analysts are assuming Lazard's revenue will grow by 9.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.5% today to 0.2% in 3 years time.
• Analysts expect earnings to reach $549.6 million (and earnings per share of $3.27) by about September 2027, up from $151.7 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 11.7x on those 2027 earnings, down from 29.8x today. This future PE is lower than the current PE for the US Capital Markets industry at 20.6x.
• Analysts expect the number of shares outstanding to grow by 3.8% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.68%, as per the Simply Wall St company report.

Risks

• Concerns about geopolitical turmoil in France and its potential impact on Lazard’s significant operations there, which could influence future revenues from one of its historically strong markets.
  
• Persistent challenges in the Asset Management segment with flow trends and remixing dynamics potentially affecting management fees and overall profitability in this area.
  
• The possibility of a deceleration in restructuring activity as interest rates decrease, which could impact Lazard’s restructuring-related advisory revenues.
  
• The need for continued investment in recruiting senior professionals and enhancing technology may maintain elevated levels of compensation and non-compensation expenses, compressing net margins.
  
• The reliance on marquee transactions for a substantial portion of advisory revenue could introduce volatility in earnings should the deal-making environment weaken.

Valuation

• The analysts have a consensus price target of $51.43 for Lazard based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $56.0, and the most bearish reporting a price target of just $40.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.6 billion, earnings will come to $549.6 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $50.11, the analyst's price target of $51.43 is 2.6% 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.