Lazard Beats on EPS, Revenue Slumps

Lazard Ltd.’s (LAZ - Analyst Report) third-quarter 2012 adjusted earnings came in at 26 cents per share, beating the Zacks Consensus Estimate by a nickel. However, the results compare unfavorably with the prior-year quarter’s earnings of 39 cents.

The better-than-expected results reflect an increase in assets under management (AUM) and a strong capital position. Yet, a decline in the top line and increase in expenses were the downsides.

After considering certain non-recurring items, Lazard’s third-quarter 2012 net income came in at $33.3 million compared with $62.7 million in the year-ago quarter.

Behind the Headlines

In the reported quarter, Lazard’s operating revenue, on adjusted basis, was $443.2 million, down 5.0% from the prior-year quarter. The decline was mainly attributable to decreased financial advisory revenues, partially offset by a hike in revenue in the corporate segment and asset management fees. However, total revenue surpassed the Zacks Consensus Estimate of $434.0 million.

Operating expenses grew 2.0% year over year to $382.1 million, attributable to a rise in compensation and benefits expenses. Management expects amortization expense of roughly $339 million in 2012, up from $289 million recorded in 2011.

Segment Performance

Financial Advisory: The segment’s total revenue stood at $220.0 million, declining 13.3% from $253.6 million recorded in the year-ago quarter. The fall was primarily due to a dip in merger and acquisitions (M&A) and strategic advisory revenues, capital markets & other advisory along with restructuring revenues.

Asset Management: The segment’s total revenue was $220.3 million, climbing 1.7% from $216.7 million reported in the year-ago quarter. The increase was primarily due to a rise in management fees, incentive fees and other revenue.

Corporate: The segment generated total revenue of $2.9 million compared with negative revenue of $3.8 million in the year-ago quarter.

Assets Under Management

AUM was recorded at $160.4 million as of September 30, 2012, up 8% sequentially. The sequential rise mainly reflected market appreciation, foreign exchange adjustments and net inflows. Moreover AUM jumped 18% year over year. Average AUM for the quarter was $156.6 million compared with $148.7 million in the year-ago quarter.

Capital Position

Lazard boasts a healthy and low-risk financial position with roughly $832.9 million in cash and cash equivalents as of September 30, 2012 compared with $1.0 billion as of December 31, 2012. As of September 30, 2012, total stockholders’ equity was $713.8 million compared with $726.1 million as of December 31, 2012.

Capital Deployment

As of October 26, 2012, the company repurchased 11.6 million shares at an average price of $27.61 per share. Further, the company paid $70 million to shareholders through dividends declared in the months of January, April and July this year.

On October 24, 2012, the company’s Board of Directors authorized an additional share repurchase program of up to $200 million, having an expiry date of December 31, 2014. This additional share buyback program resulted in total share repurchase authorization of $217 million as of October 24, 2012.

Our Viewpoint

The sluggish macroeconomic environment coupled with regulatory issues, increasing expenses and a declining top line, will likely put Lazard’s profitability under pressure in the near term. However, we believe that the company’s diverse footprint and cost-curtailment initiatives will position it comfortably in the long run. Moreover, capital deployment efforts would further enhance investors’ confidence in the stock.

Currently, Lazard retains a Zacks #3 Rank, which translates into a short-term Hold rating. However, one of its peers, Franklin Resources Inc. (BEN - Analyst Report) retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating.