A Growing Mid-Cap Financial Service Business

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In a list of the top 7 stocks that were recommended by Fool’s analysts, there are three large cap stocks, three mid-cap stocks, and one small cap stock. I have paid special attention to mid-cap and small cap stocks in this list. In previous articles, I have covered two mid-cap stocks, including Western Refining, Arcos Dorados, and one small cap stock, Tile Shop Holdings. This time, I will talk about one more mid-cap stock to see whether or not investors should buy at its current price. It is Lazard (NYSE: LAZ), a financial advisory and asset management firm.

Business Snapshot

Lazard, founded in 1848, provides financial advisory and asset management services in 27 countries throughout North America, Europe, Asia, Australia and the Middle East.

The company has two main business segments: Financial Advisory and Asset Management. The majority of its operating revenue, $1.05 billion, or 54.3%, was generated from the Financial Advisory segment in 2012. The ten largest fee paying clients accounted for around 14% of the total Financial Advisory’s revenue.

In the Financial Advisory segment, around 76% of the total revenue was generated from M&A strategic advisory service, while the restructuring service accounted for 17% of the total segment’s revenue.

In terms of the Asset Management segment, it is currently managing $167.1 billion, with nearly 50% invested in global equities. The Non-US & regional equities ranked second with around 22% of the total assets under management.

Growing Both Advisory and Asset Management Business

Lazard is considered the fourth biggest firm in terms of 2012 Advisory revenue, after Goldman Sachs (NYSE: GS), JP Morgan Chase (NYSE: JPM) and Morgan Stanley (NYSE: MS).

Goldman Sachs has the largest advisory revenue, $1.97 billion, accounting for 7% of its total revenue. JP Morgan Chase and Morgan Stanley ranked second and third, with $1.5 billion and $1.37 billion in advisory revenue in 2012, respectively.

In addition, Lazard has been gaining share of Advisory Revenue for the last 5 years. In 2007, the shares of Goldman Sachs’ and Morgan Stanley’s advisory revenue were 3.4 times and 2 times Lazard’s, respectively.

In 2012, the advisory revenue’s shares were reduced to 1.9 times for Goldman Sachs and 1.3 times for Morgan Stanley. JP Morgan’s multiples of Lazard Advisory Fees also decreased from 1.8 times in 2007 to only 1.4 times in 2012. 

<img src="/media/images/user_14219/screen-shot-2013-02-14-at-13046-pm_1_large.png" />

Source: Lazard’s presentation

Since 2005, Lazard’s asset under management have been on the rise, from more than $80 billion in 2005 to $167 billion in 2012. Fool contributor Michael Olsen has commented that there were important things about Lazard’s Asset Management segment. First, 90% of its AUM was institutional clients’ money, which was considered stickier and more long-term. Second, Lazard managers had collectively and consistently outperformed their benchmarks on all one-, three-, and five-year basis.

Peer Comparison

Since 2006, Lazard has consistently returned an increasing amount of capital to shareholders via both dividends and share repurchases, from $40 million in 2006 to $540 million in 2011. At the current trading price of $36.75 per share, the dividend yield is around 2.2%.

Goldman Sachs is trading at $154.52 per share, with a total market cap of $72.62 billion. It pays a dividend yield of 1.2% to shareholders. Morgan Stanley, with a trading price of $23.63 per share, is paying the lowest dividend yield among the four, at only 0.9%. JP Morgan, trading at $48.70 per share, is paying the highest dividend yield at 2.4%.

In terms of valuation, Lazard seems to be the most expensive with 6.4 times book value, while the book value multiples of Goldman Sachs and JP Morgan were only 1.1 and 1 times book, respectively. Morgan Stanley is the cheapest, at only 0.8 times its book value.

Foolish Bottom Line

When we invest in financial service businesses, we are betting mainly on management's capabilities. Lazard has had a quite decent performance record for the last five years. However, with the high P/B valuation, and the volatile nature of its business, I don’t feel comfortable buying Lazard at its current price. 


hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. The Motley Fool owns shares of JPMorgan Chase & Co. and LAZARD Ltd.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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