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Morningstar | Lazard Is a Tale of Two Segments: Currently Strong Financial Advisory but Tepid Asset Management

Narrow-moat Lazard's second-quarter results and recent share price reflect that it's nearly as much of an asset management firm as a financial advisory investment bank. Overall second-quarter results were higher than we expected, with the company reporting record quarterly and first-half net revenue of $758 million and $1.513 billion, respectively. Financial advisory revenue of $415 million was 23% higher than the 2016 to 2017 quarterly average. Other investment banks have also reported strong advisory revenue stemming from overall positive economic sentiment and passage of U.S. tax reform. However, Lazard's asset management revenue has been treading water, with management fees flat for the most recent three quarters. Other asset management peers have also had subdued results lately and their share prices have generally fallen since the beginning of the year. We don't anticipate making a material change to our $61 fair value estimate for Lazard. Given the pullback in the company's share price, likely attributable to its asset management business exposure, we believe that shares are modestly undervalued.

One cautionary note that we struck last quarter regarding Lazard that has partly come to pass is the strengthening of the U.S. dollar and its effect on the company. While the strengthening of the U.S. dollar didn't lead to an overall decline in financial advisory revenue, it was a primary contributor to the decrease in assets under management. AUM decreased $13.8 billion, or 5%, sequentially to $238 billion. Of the $13.8 billion decline, $8.1 billion was a result of currency movements. While financing is still accessible and supportive of acquisition activity, rising interest rates and rhetoric around trade policy could further strengthen the U.S. dollar and be a headwind to Lazard's earnings growth.