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Morningstar | We’re Lowering Our Near-Term Forecast for Lazard but Believe There's More Juice to This Cycle

After a strong start to 2018, macro uncertainties, a stronger U.S. dollar that decreases the reported value of non-U.S. revenue, and a fall in global equity markets have decreased our expectations for near-term revenue growth. That said, in the medium term, we still think there’s still a little more juice to this M&A cycle from increased non-U.S. activity, as Europe and other parts of the global economy didn’t have as strong of a deal uptrend after the financial crisis compared with the United States. Lazard has historical roots in Europe, so it will participate more in an European upturn than more U.S.-focused advisory firms. Lazard’s asset management business will continue to add to earnings stability and returns. While some might view Lazard's recent adjusted operating margins of around 25% as a peak, we believe they are sustainable. In the long run, in any decent economic scenario, we believe Lazard will naturally have 25%-plus operating margins, thanks to the asset-management business being a larger proportion of revenue and the leverage in noncompensation expenses. Asset management has grown as a percentage of revenue to around 50%, which should increase the company’s overall operating margins and earnings consistency. The asset management business’ international focus has demonstrated more resilience to fee pressure than more U.S.-focused asset managers.Overall, the combination of a strong acquisition advisory, restructuring advisory, and asset management business leads to one of the more stable businesses in the financial services sector. Given that a recession or a downturn in the capital market cycle may be around the corner, the company’s business model and earnings should be more resilient than more pure-play advisory investment banks or asset managers.