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Lazard Ltd (LAZ) Down 16.3% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Lazard Ltd (LAZ). Shares have lost about 16.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Lazard Ltd due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Lazard Q4 Earnings Beat Estimates, Costs Escalate

Lazard reported fourth-quarter 2019 adjusted earnings of 91 cents per share, comfortably surpassing the Zacks Consensus Estimate of 75 cents. However, the reported figure comes in lower than the prior-year quarter’s reported figure of 94 cents.

Higher revenues and strong AUM drove the results. However, escalating costs were an undermining factor.

Adjusted net income in the reported quarter came in at $105 million, dropping 11% year over year. On a GAAP basis, Lazard’s net income came in at $77 million or 67 cents per share compared with the $113 million or 89 cents recorded in the prior-year quarter.

For 2019, adjusted net income was $385 million or $3.28 per share compared with the $539 million or $4.16 per share reported in the previous year. On a GAAP basis, net income came in at $287 million or $2.44 per share compared with the $527 million or $4.06 per share recorded in the prior year.

Revenues Up, Costs Escalate

In the fourth quarter, adjusted operating revenues came in at $708 million, up 3% year over year. This upsurge chiefly resulted from increase in asset-management and corporate revenues, partly offset by lower financial advisory revenues.

For 2019, adjusted operating revenues were $2.55 billion, down 8% year over year.

Adjusted operating expenses were around $536.7 million in the quarter, up 6.6% year over year. Higher compensation and benefits, partly offset by lower non-compensation expenses, resulted in this upswing.

Adjusted compensation and benefits expense climbed 13%, on a year-over-year basis, to $407.1 million. Adjusted non-compensation expense for the quarter came in at $129.6 million, down 9% year over year.

The ratio of compensation expense to operating revenues was 57.5%, up from the year-earlier quarter’s 52.8%. The ratio of non-compensation expense to operating revenues was 18.3% compared with the year-ago quarter’s 20.8%.

The company affirmed its annual targets of an adjusted non-compensation expense-to-revenue ratio between 16% and 20%, while the compensation-to-operating revenue ratio target is in the mid-to-high 50 percentage range.

Segment Performance

Financial Advisory: The segment’s total revenues came in at a record $394.7 million, down 1% from the year-earlier quarter.

Asset Management: The segment’s total revenues were $301 million, up 7% from the prior-year quarter. Higher management and other fees led to this upside.

Corporate: The segment generated revenues of $12.3 million compared with the $5.2 million recorded in the year-ago period.

Steady Assets Under Management

As of Dec 31, 2019, AUM was recorded at $248.2 billion, up 15.6% from the prior-year quarter. The quarter witnessed market and foreign exchange appreciation of $16.8 billion and net inflows of $519 million.

Average AUM came in at $238.2 billion, up 6% year over year.

Stable Balance Sheet

Lazard’s cash and cash equivalents totaled $1.23 billion as of Dec 31, 2019, compared with $1.25 billion recorded as of Dec 31, 2018. The company’s stockholders’ equity was $681.6 million compared with $970.1 million as of Dec 31, 2018.

Steady Capital-Deployment Activity

During 2019, Lazard returned $850 million to its shareholders. This included dividend payment of $255 million, share repurchase of $495 million and $100 million paid for meeting employee-tax obligations in exchange of share issuances upon vesting of equity grants.

Notably, during the October-December period, the company repurchased 1.7 million shares at an average cost of $37.28 per share.

As of Jan 24, 2020, the company’s remaining share repurchase authorization came in at $379 million.


Business Restructuring

During the third quarter, Lazard conducted a review of its business, which resulted in reduction of its employee headcount, and closing of sub-scale offices and investment strategies. Approximately 200 jobs in the financial advisory, asset management and corporate functions were slashed during this period. The company incurred $51.5 million of charges related to restructuring efforts. Majority of the restructuring was done in the July-September period, while the rest was completed in the fourth quarter.

Outlook

Management expects annual effective tax rate for this year in the mid-20% range.

How Have Estimates Been Moving Since Then?

Estimates review followed an upward path over the past two months.

VGM Scores

At this time, Lazard Ltd has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Lazard Ltd has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.



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