THE HEDGEYE EDGE
Our main contention is that Wall Street is ignoring warnings signs of a high-water mark in M&A, including rising private equity participation levels and also all-time highs in consideration value.
Both metrics last peaked in 2007. In addition, the constant rise of corporate credit costs from mid-2015 to current day has widely referenced Moody's indices higher by over 100 basis points. Our research shows that a move of this magnitude has historically impacted M&A by -20% on an annual basis.
INTERMEDIATE TERM (TREND)
Lazard's asset management business is the crown jewel of emerging market (EM) and non-U.S. international investing and the company is riding the wave of successful new product introductions in strategic equity and infrastructure.
That being said the firm's EM exposure is understated and we estimate that 55% of assets-under-management, and not the stated 30%, is a more accurate picture of the company's absolute EM exposure (when going fund-by-fund and including products in Global and Multi-regional).
Lazard Asset Management has never sidestepped an EM melt-down, experiencing both negative growth and also market depreciation. In the '02-'05 EM cycle, the division experienced over -4% decay rates and market depreciation in various years of up to -10%.
LONG TERM (TAIL)
Street estimates are unbelievably complacent in our view with numbers that completely ignore the hyper-cyclicality of the advisory and asset management businesses.
If you "give" the firm the best of all worlds, the 2015 M&A revenue environment; the record restructuring revenue environment of 2009; and the high-water mark in asset management in 2014, those revenues tally $2.68 billion creating EPS of $3.79. The Street currently is at $2.78 billion in top-line for 2017 on EPS of $4.01 with '18 at $2.82 billion and $4.40.
By way of contrast, for 2016, we think the company will earn under $3 in earnings, some -20% below the Street. Our base case estimate is the stock is worth $30 per share on 10x our $3 EPS estimate for '16. Meanwhile, our bear case if M&A activity rolls over by -20%, is a $22 stock at $2.20 in earnings at a 10x multiple.