We at Insider Monkey have been busy digesting 13F filings from hedge funds and other major investors which were released in early to mid August. One new investment that we noticed was Trian Partners’ initiation of a 5.6 million share position in Lazard Ltd (NYSE:LAZ), a midsize investment bank specializing in middle market financial advisory and asset management. Lazard has lagged the markets this year and is up 5%. Yet Trian, managed by billionaire Nelson Peltz, only reported eight other stock positions in its 13F for the second quarter (see what other stocks they liked) and Lazard was the only new addition to the portfolio.
Peltz wasn’t the only manager taking an interest in Lazard either. Highfields Capital Management, run by Harvard Management alum Jonathan Jacobson, initiated a position of about 630,000 shares in the bank (find more favorite stocks from Highfields Capital Management). Ariel Investments, Royce & Associates, and billionaire Ken Fisher’s Fisher Asset Management all added to their holdings over the course of the quarter. These funds owned 6.6 million, 3 million, and 1.3 million shares of Lazard at the end of June.
Lazard’s net income for the second quarter of 2012 was roughly half of what it was in the second quarter of 2011, and the first quarter had actually been slightly worse. These results were driven by compensation expenses, which even after being flat in the second quarter displayed a 12% increase from the first half of 2011. Investment banking revenues have actually held up nicely, unlike at some other investment banks, but fees from money management (which are a similar scale of the company’s business) were down 9% in the first half of 2012 compared to a year ago. As a result of flat and low revenue growth in these respective segments, both have experienced a decline in operating income in the first half of the year.
With its business struggling considerably more in the recent past than its stock price, Lazard currently trades at 32 times trailing earnings. Even with a fairly high dividend yield of 2.9%, this is a bit pricey for a company that has seen its earnings drop as a result of slowing economic growth and even recession in some parts of the world. Wall Street analysts, however, seem bullish on the stock. The consensus expectation is for $1.84 per share in earnings in 2013, compared to the 88 cents from an annualized 1H 2012 and the $1.15 that analysts expect for the full year. In other words, analysts expect the rest of 2012 to outperform the company’s second quarter and then for 2013 to show a 60% increase in earnings per share. We think that Lazard has some room to cut costs by reducing headcount and possibly per-person compensation- there’s certainly no reason for compensation expenses to continue rising in a departure from stagnant or declining revenue- we are worried that the Street is being a bit optimistic.
In contrast to Lazard, Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS)- larger investment banks- trade at only 16 and 12 times their trailing earnings, respectively. Both of their stocks are down compared to a year ago, while Lazard’s is slightly above that level. In their most recent quarters, Morgan Stanley matched Lazard with about a 50% decrease in earnings compared to the same quarter in 2011 while Goldman’s decline was considerably softer. Like at Lazard, sell-side analysts are optimistic about these companies’ prospects next year: Goldman’s EPS are expected to pop 15%, and Morgan Stanley’s to more than double, compared to the final results for 2012. Given the fairly low trailing earnings multiples, this brings Goldman to a forward P/E of 8 and Morgan Stanley to a forward P/E of 7. We’re similarly skeptical of this optimism, but these two peers are better priced compared to historical numbers and we think they’re better buys than Lazard.