Investors knew that Lazard (NYSE:LAZ) would have a strong quarter. After all, with the surge in mergers and acquisitions, it would be tough not to. But Lazard was able to deliver more than the Street expected, and as a result, the stock price increased 4.5% to $54.60. Still, compared with its peers, the stock's valuation is showing some frothiness.

In the fiscal fourth quarter, revenues increased 29% to $472.9 million, and earnings increased 50% to $85.8 million or $0.78 per share.

Lazard's core business is providing advisory services for M&A transactions. In fact, since 1848, the firm has built a sterling brand and a global footprint. Moreover, CEO Bruce Wasserstein is a legendary deal-maker.

All of this certainly helps snag big-time advisory engagements. Some of the deals in the quarter include:

  • Pfizer's (NYSE:PFE) $16.6 billion spin-off of its health-care division to Johnson & Johnson (NYSE:JNJ)
  • GM's (NYSE:GM) sale of GMAC to Cerberus Capital for $14 billion.
  • Bank of New York's (NYSE:BK) $16.5 billion merger with Mellon Financial (NYSE:MEL).

Lazard is also getting traction with its asset-management business. For example, in 2006, segment revenues increased 18% to $548 million, and net inflows of assets were $2.8 billion. In all, the firm has about $110 billion under management.

In light of the strong growth, it should be no surprise that Lazard has a hefty valuation in terms of P/E and price-to-book ratios, at least compared with larger investment banks, such as Goldman Sachs and Morgan Stanley (NYSE:MS). Keep in mind that, during December, Lazard sold $350 million in a secondary offering (the pricing was $45.42 per share).

Lazard still faces risks; the company is fairly undiversified, and the M&A business can be quite volatile. After all, it was during 2001 to 2003 that the industry was mired in a downturn.

True, Lazard's growth is likely to continue. Then again, this should be the case with Goldman and Morgan as well. And these firms have broader platforms that can better withstand a downturn. Thus, if you want to participate in the boom in high-end financial services, going with Goldman or Morgan may be the better bet.


Pfizer is a Motley Fool Inside Value recommendation. Johnson & Johnson is a Motley Fool Income Investor recommendation. Try any one of our investing services free for 30 days.

Fool contributor Tom Taulli does not own shares mentioned in this article.