Will Healthy M&A Activity Make Lazard A Top Stock in 2015?

by Ryan Fitzwater, Director of Research, The Oxford Club
mergers-aquisitions

Today not only marks the last day of 2014, but also signals the end of a robust year for mergers and acquisitions (M&A).

We close out the year with more than $1.5 trillion M&A deals penned in 2014, up from $998 billion in 2013. That’s a 52.3% jump in U.S.-based M&A activity, according to Reuters.

Time to raise a glass; M&A deals in the U.S. finally reached pre-recession levels.

And the industry expected to carry the M&A torch into 2015 is healthcare. KPMG polled more than 700 M&A professionals, and 85% of them expect heavy activity in the sector thanks to deteriorating drug pipelines, large cash reserves, consequences from the Affordable Care Act and easy credit.

Positive Sentiment Is Back

Economic growth, a strengthening job market and swelling stock prices were more than an afterthought in the gloomy-doomy days of October. But the market sentiment canvas has been painted anew in the past few weeks, as the markets have hit new all-time highs.

According to the American Association of Individual Investors Sentiment Survey, 50.9% of investors are bullish on the stock market for the next six months, up from 35.42% in October. Clearly things seem rosier to the masses.

Of course things aren’t as rosy for the oil and gas sector, but this provides a more fertile environment for continued takeover and buyout activity. With oil prices beaten down violently over the past few months, the M&A flames will continued to be fanned as larger oil companies target smaller players to help boost growth they cannot achieve organically.

As a result, M&A deals look to continue their climb into 2015.

This is good news for financial advisory and asset management firm Lazard (NYSE: LAZ).

Charging for Advice

Based in the beautiful tax haven paradise of Bermuda, Lazard derives over half of its sales by doling out M&A, restructuring and regulatory advice to corporations and government entities. It does this through its advisory business arm.

Its other business segment is asset management, which provides services in equity and fixed income.

The rise is M&A activity in 2014 has been welcomed with open arms by Lazard.

In the most recent quarter, the company’s advisory business boosted sales 24% to $291 million over the same period last year.

Deals it advised for the quarter included acquisitions by cigarette marker Reynolds American (NYSE: RAI) of competitor Lorillard (NYSE: LO) for $27.4 billion and Reynolds’ sale of multiple brands and assets to Imperial Tobacco. Any lover of AMC’s Mad Men knows that billing big tobacco is a quite a lucrative endeavor.

And this month alone, Lazard has announced eight deals for which it will serve as an advisor.

Lazard Primed for Growth in 2015?

As I already mentioned, this year’s storm of M&A activity is expected to keep brewing well into 2015. The conditions are right in the U.S.

And with 14 analysts rating Lazard a buy - including Joel Jeffery with KB&W, who just upgraded it to “outperform” - investors should be ready to happily ride the stock into 2015.

But don’t pop the champagne just yet…

While forecasts and polls can be helpful, predicting the future is a hazardous act. Past deal activity doesn’t mean future volume will stay strong. And with a slowdown in economic growth in both Europe and Asia, it is important to remain cautious.

Lazard’s CEO, Kenneth Jacobs, states “we are cautiously optimistic about the environment.” And he notes that some volatility has returned to the markets, but that Lazard is well-positioned to benefit from returned M&A activity across the pond.

While both Jacobs and other M&A professional are optimistic about M&A deals in 2015 - and have good reasons to back their optimism up - we need to evaluate the situation the best we can today.

A good technique to do that is by evaluating a company’s current financial standing. And we can quickly and painlessly do that with our Investment U Fundamental Factor Test.

Judging Lazard’s current financial health will not only help us determine if it has the ability to thrive and outperform its competitors in a growing M&A market, but it will also allow us to evaluate its balance sheet and gauge if it’s healthy enough to stick around if the global economy and M&A deals start to unwind.

Earnings-per-Share (EPS) Growth: In the most recent quarter, Lazard saw a 48.98% boost in EPS compared to the same period last year. Clearly 2014’s increased M&A activity, along with a bump in demand for its asset management services, helped it achieve strong double-digit earnings growth the quarter.

Price-to-Earnings (P/E): On an earnings basis, Lazard is well priced. Its P/E of 18.42 is well below the industry average of 24.22.

Debt-to-Equity : Lazard’s 164.41% debt to equity might seem high, but on an industry basis it is not nearly as overleveraged. The industry as a whole is averaging 273.2%. Don’t be too alarmed; leverage of these heights is common considering investment banks like Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) are in its industry group. While overleveraging to boost returns should always concern investors, it is what investment banks are in the business of doing. And debt-to-equity ratios still aren’t approaching 2007 Armageddon levels. Today Goldman Sachs and Morgan Stanly have debt to equity ratios of 524% and 525% respectively. In December of 2007, those ratios clocked in at 1,224.84% and 2,179.71%. We all know what happened next. So today, it is nice to see Lazard well below the pack.

Free Cash Flow per Share Growth : In the most recent quarter, Lazard saw free cash flow jump 95.69%. Growth close to triple digits is always welcomed.

Profit Margins : Lazard’s profit margins of 15.28% are a sliver above the industry’s 15.04% average. It barely beat out the group, but we will take it.

Return on Equity : And Lazard closes out the last metric for a prefect score. Its ROE is 53.31% is well above the industry average of 14.41%. Management is definitely doing its job here.

After passing every metric, Lazard gets a “strong buy” rating. The company looks fit enough to endure any market pullbacks and looks primed to profit in 2015 if M&A activity continues its climb.

*Why did we look at these specific metrics? Find out more here.

Fundamental Factor Test Score

A: Strong Buy (Hits five or more key metrics)

Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That’s why The Oxford Club offers over a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth. For more details, click here.

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