June 20, 2007

Even though the market is near record highs, there still are some (quality) stocks that have fallen. One of them that I really like is Lazard (nyse:laz). IF you dont know this company, they have two divisions: Financial Advisory– advisory on mergers and restructuring and Asset Management– managing money for institutions and wealthy individuals. As you know, the M&A market has been really strong lately, and thus, Lazard’s profits have grown tremendously. Also, over the past few years, Lazard has made a huge investment in the AM division, which now represents 43% of the firm’s revenue. What I like about this company is that the M&A market and Restructuring market are counter cyclical, so when the economy is hot, the m&a market is great, and when its not, companies file for bankruptcy and this division does well. Also, the asset management is a great way to diversify from the advisory business, while still taking advantage of their world-class brand name and knowledge of the capital markets.  Because the stock market, and thus the firm’s profits, is so unpredictable, I cannot do a realistic DCF valuation. Instead, I took the average P/E of the major AM firms, like Legg Mason, Blackrock, etc.  and the average P/E of the major advisory firms, like Greenhill, Evercore and Thomas Weisel, and weighted them according to their respective % of the firm’s profits. I then multipled it by last years EPS of $2.16 and got a valuation of $61.92, or 30% above todays price.  In short, I think that in this market turbulence we are given an opportunity to buy a great firm at a cheap price over the Street’s unwarranted fears that the company will not survive an M&A slowdown.