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Lazard Beats on Earnings and Revenues

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Lazard Ltd.’s (LAZ - Free Report) third-quarter 2013 adjusted earnings came in at 46 cents per share, easily beating the Zacks Consensus Estimate of 35 cents. Moreover, this compares favorably with 26 cents earned in the prior-year quarter.

Better-than-expected results were driven by strong top-line performance, primarily aided by increase in financial advisory as well as asset management revenues. Moreover, the company’s strong capital position and higher assets under management (AUM) were the positives. However, higher expenses were a dampener.

After considering certain non-recurring items, Lazard’s third-quarter 2013 net income came in at $60.3 million or 45 cents per share. This was considerably higher than the prior-year quarter net income of $33.3 million or 26 cents.

Behind the Headlines

In the reported quarter, Lazard’s operating revenues, on an adjusted basis, came in at $488.7 million, up 10% from the prior-year quarter. The rise was mainly attributable to increase in financial advisory revenues and asset management fees. Moreover, total revenue outpaced the Zacks Consensus Estimate of $460.0 million.

Operating expenses increased 4.3% year over year to $389.2 million due to higher compensation and benefits expenses, along with higher non-compensation expenses.

Segment Performance

Financial Advisory: The segment’s total revenue was $233.8 million, up 6% from the prior-year quarter. The rise was primarily due to increase in both strategic advisory revenues and restructuring revenues.

Asset Management: The segment’s total revenue was $248.1 million, up 13% from the prior-year quarter. The rise was mainly due to increase in management fees and other revenues, partially offset by a fall in incentive fees.

Corporate: The segment generated total revenue of $6.8 million compared with $2.9 million in the prior-year quarter.

Assets Under Management

AUM was recorded at $176.5 billion as of Sep 30, 2013, up 10.0% year over year. The rise came on the back of higher market appreciation and rise in net inflows. Average AUM as of Sep 30, 2013, came in at $171.5 billion, up 9.5% year over year.

Capital Position

Lazard boasts a healthy and low-risk financial position with roughly $688.4 million in cash and cash equivalents as of Sep 30, 2013, compared with $850.2 million as of Dec 31, 2012. Total stockholders’ equity was $657.1 million compared with $651.5 million as of Dec 31, 2012.

Capital Deployment

In the reported quarter, Lazard returned $64 million to shareholders. This included share repurchase of Class A common stock worth $27 million, dividend payment worth $31 million, along with $6 million paid for meeting employee tax obligations in exchange of share issuances upon vesting of equity grants.

As of Sep 30, 2013, Lazard repurchased 3.2 million shares at an average price of $33.72 per share during the first nine months of the year. At the quarter-end, the company had a remaining share repurchase authorization worth $76 million. Additionally, on Oct 23, 2013, the board of directors authorized an additional share repurchase of up to $100 million, which will expire on Dec 31, 2015.

Cost Saving Initiatives

In 2012, Lazard announced cost saving initiatives, which were expected to generate annual savings of around $160 million, partially offset by certain business investments.

Approximately $120 million of the expected total savings are related to reduction of the employees’ compensation expense, while the remaining $40 million are from the reduction of non-compensation expense. The company expects more than two-thirds of these cost savings to be realized in 2013 and the full impact of all the savings to be reflected in full-year 2014 results.

Peer Performance

Among other asset managers, The Blackstone Group L.P.’s (BX - Free Report) third-quarter 2013 economic net income (ENI) came in at 56 cents per share, missing the Zacks Consensus Estimate by a penny. However, this compares favorably with ENI of 55 cents recorded in the year-ago period.

Lower-than-expected results were due to a fall in top line, partially offset by lower expenses. However, strong growth in assets under management (AUM) and an improved balance sheet were the tailwinds for the quarter.

Our Viewpoint

The sluggish macroeconomic environment, stringent regulations and net outflows will likely put Lazard’s profitability under pressure in the near term. However, we believe that the company’s diverse footprint and cost containment initiatives position it favorably in the long run. Moreover, Lazard’s capital deployment efforts are expected to further enhance investors’ confidence in the stock.

Lazard currently carries a Zacks Rank #3 (Hold). Among other investment managers, Legg Mason Inc. (LM - Free Report) and Invesco Ltd. (IVZ - Free Report) are scheduled to report results for the quarter ended September on Oct 25 and Oct 31, respectively.

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