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Friday, 19 December 2014

Luxury problem

Activist bet on Evercore would have beaten Lazard

Nelson Peltz must be happy with his stake in Lazard. The activist investor jumped into the stock early last year. Since then, Lazard’s stock has gone up 50 percent and its third-quarter results on Thursday show the firm is on track. There’s just one wrinkle for Peltz: he would have done even better, doubling his money, owning smaller advisory outfit Evercore.

Peltz, who often advocates change at companies he invests in, has not been agitating publicly for Chief Executive Ken Jacobs to improve Lazard’s performance. Instead, he endorsed the stringent targets Jacobs set out 18 months ago, describing the firm as one of the best brands in the business. What’s more, Peltz made clear in a regulatory filing earlier this year that he’s a passive shareholder.

His faith in Jacobs has been rewarded. Lazard’s operating margin breached 20 percent in the three months to September, well on the way to Jacobs’ target of 25 percent by the end of 2014.

The firm’s M&A bankers have done well in a sluggish market, restricting the decline in their top line since the 2007 peak to around 15 percent while rivals have lost as much as half their revenue. On top of that, Lazard’s asset management unit accounted for just over half sales in both the last quarter and the previous 12 months.

That’s desirable diversification, but it may also partly explain why Lazard’s stock rise has not been as stellar as Evercore’s. Investors tend to award higher valuation multiples to boutique advisory firms than to asset managers. In Evercore’s case, pure investment banking revenue alone would warrant a premium – it rose 27 percent in the first nine months of this year compared with a 10 percent drop at Lazard. It’s perhaps no surprise the stock has surged 100 percent since April last year.

Lazard’s operating margin is bigger than Evercore’s. Yet both firms trade at a discount to the 23 times expected 2014 earnings enjoyed by Greenhill, whose third-quarter operating margin was a dismal 6 percent – though for the year so far, it’s still a strong 23 percent. That underlines how hard it is to link performance directly with valuations. Peltz has no reason to regret his punt on Lazard, but the investor might wish he’d also looked elsewhere.

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Lazard on Oct. 24 reported adjusted third-quarter net income of $62 million, an 81 percent increase on the same period last year. At 46 cents a share, results beat the consensus sell-side estimate of 36 cents a share, according to Thomson Reuters I/B/E/S.

Evercore on Oct. 23 reported third-quarter net income of $14 million, or $0.36 per share, up 163 percent compared to the third quarter of 2012.

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