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Morningstar | Lazard Is One of the Higher Quality Financials That We Wouldn’t Worry About in a Recession

The more dour outlook on the global economy that picked up steam in the back half of 2018 has continued into 2019, casting doubt on whether Lazard's financial advisory and asset management revenue will continue growing the next couple of years. With Lazard deriving half of its revenue from asset managment and half from financial advisory, the company's revenue and earnings are cyclical. However, Lazard has a strong restructuring business and little balance sheet risk, as its balance sheet isn't highly leveraged. In addition, unlike other investment banks, Lazard doesn't hold a significant amount of securities for trading on its balance sheet. As a result, it is one of the higher quality financials which gives us less concern in the event of a recession. In the long run, 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 have around 25% normalized 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 nearly 50%, which should increase the company’s overall operating margins (as the asset management segment recently had operating margins around 30% compared with the lows 20s for financial advisory) and earnings consistency. The asset management business’ international focus has also demonstrated more resilience to fee pressure than more U.S.-focused asset managers.The company is one of the leading financial advisory firms, but has a more mature growth profile compared with other advisory boutiques that have gone public in the past several years. Smaller advisory firms can have more opportunities for growth from adding managing director headcount. Lazard has fewer new advisory areas in which to expand, but could have some acceleration from a stronger recovery in Europe, where it historically derived upward of 40% of its advisory revenue.