EUR 850.00 For Business Accounts Only

Morningstar | Lazard's Shares Are Being Weighed Down by Macro Concerns; Shares Moderately Undervalued

Despite decent 2018 results, narrow-moat Lazard's shares are being weighed down by macroeconomic concerns. Looking at the company's most recent results, the back half of last year played out largely as expected with revenue up 1% when compared with the second half of 2017, but down 13% compared when compared with the first half of 2018. While last year started off on a high note with generally positive economic sentiment amid the benefits expected from the decrease in the U.S. corporate tax rate, the third quarter of 2018 brought with it major concerns for companies with asset management businesses and the fourth quarter fostered an increasingly cautious outlook for global GDP growth. With Lazard being about half asset manager and half financial advisory firm, the company had nowhere to hide from the equity market downturn and the decline in corporate executive confidence.

Given our belief that the equity markets are fairly valued to modestly undervalued, and that we are more likely to experience a slowdown in economic growth rather than a recession, we feel that the market is being overly pessimistic about the company's prospects, reflected in its undervalued shares. While there is headline risk in 2019, especially with regard to European economic growth and Brexit (with 30% to 40% of Lazard's revenue historically coming from Europe), we think some of this is already built into the stock. Management has taken advantage of the discount in its shares, buying back 6.4 million shares (or more than 50% of the shares Lazard repurchased during 2018) during the fourth quarter, when the company's shares were priced 20% lower than they were during the first half of 2018. Lazard also declared a special dividend of $0.50 per share (down from $1.30 the previous year) and added $300 million to its repurchase authorization. While we view these actions as accretive, we don't anticipate making a significant change to our $58 per share fair value estimate for Lazard.