Lazard Earnings: New CEO Has a Growth Objective as Firm Changes to C-Corp

Lazard LAZ is changing to a C-Corporation from a partnership, and new CEO Peter Orszag is trying to make Lazard into a growth company. Net income to common shareholders in the third quarter was $7 million, or $0.06 per diluted share, on $524 million of net revenue. Net revenue of $524 million was down 28% from the previous year, 19% from the previous quarter, and was the lowest net revenue quarter since 2016. The current environment is close to the worst it can be for Lazard’s financial advisory business, with economic uncertainties weighing on merger activity but the underlying economy holding up, so restructuring isn’t near prior peak activity. That said, many investment banking management teams are cautiously optimistic regarding activity in 2024 given relatively healthy economic indicators in the U.S. but increasing global macroeconomic uncertainties. Stability or a small decrease in interest rates in 2024 could also spur merger activity, while the still relatively high interest-rate level could increase restructuring activity. We don’t anticipate making a significant change to our $37 fair value estimate for narrow-moat-rated Lazard and assess shares as moderately undervalued.

Orszag aims to double revenue by 2030 and deliver average total shareholder returns of 10%-15% per year through 2030. Disclosed plans include hiring more managing directors, increasing employee productivity, improving asset-management distribution, and acquiring emerging asset managers. Advisory firms that hired aggressively in the past decade generally did well. However, the past decade benefited from low interest rates, while the next decade will likely have relatively higher interest rates and increased geopolitical uncertainty. For the moment, we’re rather skeptical of revenue doubling.

Transiting to a C-Corp is expected to increase corporate taxes several percentage points, and we’re neutral to negative on this change.