Lazard Earnings Beat Ests, Revs Up - Analyst Blog

Driven by top-line growth, Lazard Ltd.'s LAZ first-quarter 2014 adjusted earnings came in at 61 cents per share, easily beating the Zacks Consensus Estimate of 55 cents. Moreover, this compares favorably with 28 cents earned in the prior-year quarter.

Our proven model predicted that Lazard may post an earnings beat as it has the right combination of two key ingredients – positive Earnings ESP and a Zacks Rank #3 (Hold) or higher. It had a positive Earnings ESP with a Zacks Rank #2 (Buy).

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, elevated expenses exhibited undisciplined expense management.

After considering certain non-recurring items, Lazard's first-quarter 2014 net income came in at $81 million or 61 cents per share compared with $15 million or 12 cents per share in the prior-year quarter.

Performance in Detail

In the first quarter, adjusted operating revenues came in at $540.2 million, up 31% year over year. The rise was mainly attributable to increase in financial advisory revenues and asset management fees. Moreover, revenues surpassed the Zacks Consensus Estimate of $512.0 million.

Operating expenses were $420.8 million, up 20.9% year over year. The upsurge stemmed from higher compensation and benefits expenses as well as elevated non-compensation expenses.

Adjusted non-compensation expense for the first quarter was $103 million, up 3% year over year. The ratio of non-compensation expense to operating revenue was 19.1% compared with 24.1% in the prior-year quarter.

For 2014, the company targets an adjusted non-compensation expense-to-revenue ratio between 16% and 20%, while adjusted compensation ratio to be in the mid-to high-50s percentage range.

Segment Performance

Financial Advisory: The segment's total revenue was $275.5 million, up 64% from the prior-year quarter. The rise was primarily due to increase in M&A and other advisory revenues, partially offset by decreased restructuring operating revenue.

Asset Management: The segment's total revenue was $262.3 million, up 9% from the prior-year quarter. The rise was driven by increase in management fees, other revenues and incentive fees.

Corporate: The segment generated total revenue of $2.4 million, down 56% year over year.

Assets Under Management

AUM was recorded at $189 billion as of Mar 31, 2014, up 10% year over year. The company recorded net inflows of $0.8 billion and market appreciation of $1.7 billion. Average AUM as of Mar 31, 2014, came in at $186 billion, up 9% year over year.

Capital Position

Lazard boasts a healthy and low-risk financial position with roughly $666.6 million in cash and cash equivalents as of Mar 31, 2014, compared with $841.5 million as of Dec 31, 2013. Total stockholders' equity was $555.6 million compared with $630.0 million as of Dec 31, 2013.

Capital Deployment

During first-quarter 2014, Lazard returned $225 million to shareholders. This included share repurchase of Class A common stock worth $107 million, dividend payment worth $36 million, along with $82 million paid for meeting employee tax obligations in exchange of share issuances upon vesting of equity grants.

Further, Lazard repurchased 2.6 million shares at an average price of $44.77 year-to-date. As of Mar 31, 2014, the company had a remaining share repurchase authorization worth $15 million.

Recently, Lazard's board of directors also authorized additional share repurchases of up to $200 million, expiring on Dec 31, 2015.

Competitive Landscape

Among other asset managers, Franklin Resources Inc.'s BEN March quarter-end results missed the Zacks Consensus Estimate, while Affiliated Managers Group Inc. AMG and Ameriprise Financial, Inc. AMP outpaced the Zacks Consensus Estimate.

Our Viewpoint

The sluggish macroeconomic environment, stringent regulations and net outflows might 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.