Lazard Ltd. (NYSE: LAZ) is not your typical sort of company that an activist investor would normally go after.  in fact, Lazard itself advises companies and individuals on things like financial advisory services and asset management services in and around mergers and acquisitions, strategic moves, restructurings and other activities. So why is it that Trian Fund Management has taken a 5.1% stake purchasing 6.3 million shares in the company?

Trian is under Nelson Peltz, who often goes after companies that are either undervalued or where management can use ‘assistance’ in their strategy.  The filing calls Lazard an undervalued company, but Peltz also said that he supports the company’s new strategic plan around margin improvement, capital allocation, and better corporate governance.

While Lazard’s earnings were down by more than half in the last quarter, much was tied to a restructuring and layoffs.  Here is how Trian’s release noted the position:

• “Trian believes Lazard is a premier global financial services company with significant brand and franchise value. Lazard’s attractive low capital-intensive, fee-based business model is positioned to be a natural beneficiary of long-term financial market trends. Trian has had several meetings with Lazard’s management to discuss its business and strategies to enhance shareholder value. Trian supports Lazard’s new strategic plan, announced on April 27, 2012, which is focused on margin improvement, shareholder-friendly capital allocation, and improved corporate governance and transparency.”

Trian went as far as to say that if Lazard successfully executes on its plan earnings per share could rise to more than $3.50 per share in 2014.  Lazard was trading at just over 16-times its expected 2012 earnings from Thomson Reuters before today’s Trian stake news was out.  Imagine if Peltz is correct here. First we have to decide what the market values Lazard at and what is a fair multiple for its earnings.  Even if you drop this down to 10-times expected 2014 earnings the numbers could be huge.  A 10-times earnings multiple of $3.50 per share would yield a $35.00 share price.  Thomson Reuters has a consensus price target objective of $30.75 as is.

After a 4.6% gain on the Trian news, Lazard shares are at $24.18 on the day. If Peltz is correct, then investors could be looking at a 50% gain.  If the Wall Street consensus target is right, then investors have more than 25% upside in the stock.

Where this gets more interesting is that $35.00 would not even get this firm back to what is a 52-week high as its range in the last year has been $19.04 to $38.11.  The firm also pays a dividend yield of about 3.5% as of now and that is higher than most financial outfits are paying today.

JON C. OGG

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