Rising Net Outflows, Concentration Risk Hurt Lazard (LAZ)
Lazard Ltd’s LAZ high reliance on financial advisory fees for a substantial portion of its revenues is concerning. Continued net outflows will affect the company’s assets under management in the upcoming period. Further, its capital distribution activities seem unsustainable.
Analysts are also not optimistic about the company’s earnings growth potential. Over the past week, the Zacks Consensus Estimate for LAZ’s 2023 earnings has been revised marginally lower. Thus, the company currently carries a Zacks Rank #5 (Strong Sell).
In the past three months, LAZ shares have gained 23.3% compared with the industry's 19.9% rise.
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Particularly, financial advisory revenues contributed 49.2% to Lazard’s total operating revenues in third-quarter 2023. Financial advisory revenues declined in the first nine months of 2023, signaling weakness in the company’s revenue-generation capacity. The muted global merger and acquisition deal volumes, as well as a slump in capital market activities, are affecting growth in the company's financial advisory revenues.
Lazard is anticipated to continue to rely on financial advisory fees for a substantial portion of its revenues in the foreseeable future. This, along with the ongoing weak market conditions, is concerning for the company’s top-line growth in the near term. We estimate the metric to decline 30.4% in 2023.
Also, Lazard has been witnessing a steady increase in net outflows for the past several years. In the last four years (ended 2022), net outflows saw a compound annual growth rate (CAGR) of 23.1% mainly due to outflows witnessed in the equity asset class. Nonetheless, in the first nine months of 2023, it recorded net inflows of $8 million. We anticipate net outflows of $839 million, $2.34 billion and $2.05 billion for 2023, 2024 and 2025, respectively. A challenging operating backdrop, highlighted by equity outflows in the emerging markets, is a hindrance for the near term.
Also, Lazard’s capital distribution activities make us apprehensive. The company announced a hike in its quarterly common stock dividend of 6% in July 2022. In the first nine months of 2023, Lazard repurchased 2.8 million shares at an average price of $36.67 per share. As of Sep 30, 2023, $200 million worth of share repurchase authorization was available under the said plan.
However, its payout rate and debt/equity ratio seem unfavorable compared with the broader industry’s respective averages. The company’s performance over the last few quarters was volatile. Hence, given these unfavorable factors, we believe that the capital-distribution activities might not be sustainable.
Stocks Worth a Look
A couple of stocks from the same space worth a look are Noah Holdings NOAH and Principal Financial Group PFG.
Noah Holdings currently carries a Zacks Rank #2 (Buy). Its earnings estimates for 2023 have been unrevised at $2.16 over the past 60 days. In the past three months, NOAH shares have gained 10.6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Earnings estimates for Principal Financial have been unrevised at $6.42 for 2023 over the past 30 days. Shares of Principal Financial have rallied 15.7% in the past three months. Currently, the company carries a Zacks Rank #2.
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Principal Financial Group, Inc. (PFG) : Free Stock Analysis Report
Lazard Inc. (LAZ) : Free Stock Analysis Report
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