Thursday, May 9, 2019

A Current AIM International Equity Holding: Lazard Ltd. (LAZ, $38.68): “M&A Saved the Day” By: Robert Metcalf III, AIM Student at Marquette University

Lazard Ltd. (LAZ, $38.68): “M&A Saved the Day”
By: Robert Metcalf III, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Lazard Ltd. Class A (NYSE:LAZ) is a preeminent global financial advisory and asset management firm. They specialize in the creation of customized solutions to the complex financial and strategic challenges of a diverse set of clients including corporations, governments, institutions, partnerships and individuals.

• LAZ reported their interim report for Q1 2019 on April 30 with overall results coming in lower than the comparable period last year primarily due to their strong activity in the U.S. being offset by softness in Europe. First quarter operating revenue of $330 million was down 15% from last year, reflecting reduced levels of completed activity in Europe and Asia.

• In Q1, LAZ repurchased approximately 5.2 million shares in addition to their repurchase of roughly 6 million shares in Q4 2018.

• Year-to-date, LAZ’s world-leading global restructuring practice is ranked number one for announced restructuring deals globally.

• LAZ reported EPS of $0.87, down from a record 1Q 2018 of $1.26, but beating the consensus of $0.65 for 1Q19.

Key points:

LAZ’s CEO, Kenneth Marc Jacobs, gave insight to the macroeconomic environment in Europe, by mentioning that uncertainties with Brexit weighs heavily on activity levels not just for Europe, but for the continent as well. Additionally, the softness in Germany that came in the second half of 2018 as well as the beginning of 2019 appears to be export-driven and tied to part of China. This is not good for LAZ as the macro theme is that China is committed to increasing/changing to internal consumption based GDP and becoming less dependent on exports, which could cause further problems for Germany.

LAZ repurchased $283 million of stock in the quarter following a net $250 million senior note debt issuance in early March. Managements more aggressive buyback plan is poised for meaningful reacceleration in 2019. Management indicated that they were optimistic about issuing debt to fund their share repurchases as it will take advantage of LAZ’s deflated share price, remain cash flow accretive, leave LAZ with minimal leverage and offer substantial operating cash flows.

LAZ’s reported Q1 2019 EPS of $0.87, beating the consensus of $0.65. This surprise was primarily driven by advisory revenues being higher than expected as well as the help from a lower tax rate and higher buyback activity. While EPS still declined meaningfully from the same period last year at $1.26, it is encouraging to see strong activity in the U.S. for their advisory business.

What has the stock done lately?

The stock is up 3.34% in the last month stemming from their M&A advisory business getting a boost from a string of big-ticket deals in the United States. Lazard advised on IBM Corp’s $34 billion acquisition of Red Hat as well as Athenahealth Inc.’s $5.7 billion sale to Veritas Capital.

Past Year Performance:

LAZ was purchased in May 2017 at $44.50 with a price target of $54.80. Since then, the stock rose to about $58.00 in early 2018, but quickly began to decline as it hit a 52-week low of $33.54 in December 2018. The stock is currently trading at $38.68 representing a year-over-year return of -26.42%.

Source: FactSet
My Takeaway:

Lazard is an active M&A advisor in the global market as they closed $43.8 billion in completed transactions in Q1 2019 and ranked 12th in the world for M&A advisor fees while maintaining the leading position for announced restructuring deals globally. Q1 2019 overall results were down from the prior year period, but LAZ’s Q1 EPS of $0.87 shows positive signs as management is showing effort to mitigate economic headwinds. I believe it would be premature to sell shares at this time considering the stock is up 6.17% YTD, is trading at a discount relative to peers, and saw a 7% increase in dividend yield this quarter, allowing investors to be paid to wait for stock appreciation.

Source: FactSet