It was a case of bad news/ good news for Jefferies Financial (NYSE:JEF) in its first-quarter earnings report. The bad news seemed to influence investors following the report’s release on Wednesday after the closing bell, as the stock price tumbled more than 4% on Thursday. However, the good news is what makes Jefferies stock buy right now.
Let’s take a look at where this Wall Street investment bank stands.
$55 million loss from hedge fund
First, the bad news: Jefferies missed earnings estimates in its fiscal first quarter, as its net income came in at $150 million or 66 cents per diluted share, which was short of the 75 cents per share that analysts anticipated. Earnings were dragged down by a $55 million loss associated with Jefferies’ investment in the Weiss Multi-Strategy Advisers hedge fund, which recently announced that it is shutting down. Without that loss, Jefferies would have had $196 million in net income, or 87 cents per diluted share.
“We are disappointed in the outcome at Weiss Multi-Strategy, but we are pleased that the shutdown was orderly and investors protected,” said CEO Richard Handler and President Brian Friedman in the earnings report. “Our loss is a result of support we provided the platform that was incremental to our separately managed account.”
This miss may have been the reason the stock was dropping on Thursday, because otherwise, it was a strong quarter.
Jefferies beat revenue estimates, bringing in $1.74 billion, a 35% increase year over year. It notched a huge quarter in its asset-management business, which comes as no surprise as the stock market soared over the last three months that ended Feb. 29. Asset-management revenue climbed a whopping 299% to $273 million from $68 million the same quarter a year ago.
Even more noteworthy was the strength of Jefferies’ investment-banking business, which saw its revenue spike 28% quarter over quarter and 31% year over year to $740 million. Last year was one of the worst on record for mergers and acquisitions. Thus, the fact that Jefferies saw a huge uptick in the latest quarter is a good sign, not just for the firm itself but also for the larger M&A market and the economy, as M&A activity typically signals a stronger economy.
“We expect our investment banking momentum to continue, and the market share gains we have achieved compared to the prior quarter and prior year quarter across advisory, equity underwriting and leveraged finance to continue, as the investments we have made in our business further mature,” Handler and Friedman said.
Why Jefferies is a buy
The market drop on Thursday did not make a whole lot of sense, as Jefferies’ M&A, advisory, and underwriting businesses are clearly on an upswing. After two of the worst years in recent history, there is a lot of pent-up demand, and we are already seeing that through the first few months of the year. Additionally, as the Federal Reserve begins to lower interest rates, activity should spike, as the Fed appears to be engineering the soft landing it had hoped for.
Jefferies did not offer any earnings guidance for 2024, but that is typical as it doesn’t usually issue any official outlook. However, the executive team sounded very bullish in their annual shareholder letter released in January.
“[T]he two of us could not be more excited to enter 2024 to experience what we can accomplish as a global team. In our combined 55+ years at Jefferies, we have never seen our firm better positioned,” Handler and Friedman wrote.
Thus, Thursday’s sell-off is not a concern and in fact, it lowers the valuation of a good stock that is trading at just 12 times forward earnings. Jefferies looks like a solid option and one to watch.
