EUR 850.00 For Business Accounts Only

Morningstar | We Believe Too Much Negativity Is Being Priced Into Lazard's Shares

We assess that narrow-moat Lazard's shares are moderately undervalued, as negative sentiment has expanded from half of its business to its whole business. The previous quarter, we remarked that the company's shares were likely under pressure, due to its asset-management business. Now, not only have stocks with asset-based fees been declining, but the future earnings of merger advisory firms are being called into question from a third-quarter slowdown and macro concerns that can weigh on future deal activity. That said, results were decent, with the company reporting flat net revenue and diluted earnings per share compared with the previous year of $626 million and $0.82, respectively. We don't anticipate making a material change to our $60 fair value estimate for Lazard.

We're currently positive on Lazard's valuation and likely capital actions, but earnings growth will be pressured. Management appears to agree with us that the company is undervalued, as they commented that they've earmarked part of the $250 million of cash remaining from a recent debt raise for repurchases and that the company may consider a shift to more repurchases from its customary special dividend. However, management also commented that second-half 2018 revenue is on track to be higher than the second half of 2017, which is sort of a low bar. The second half of 2017's revenue was approximately 14% lower than the first half of 2018's revenue, so management is generally acknowledging that revenue is becoming softer. Overall, there's a feeling that acquisition volumes may decrease from increasing fear of trade restrictions reducing cross-border acquisition activity and financing may be becoming tougher to obtain as interest rates increase and the equity market has dropped. Lazard is a strong company that will grow over time, but the near term could be challenging.