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Jefferies Feels the Pinch of Tough Markets

By Dan Caplinger - Updated Apr 22, 2019 at 11:50AM

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The financial company gave an early report due to a fiscal-year change.

Jefferies Financial Group (JEF 2.74%) has been going through a number of changes lately. The company formerly known as Leucadia National has concentrated on the financial side of its business operations, adopting the name of its primary financial subsidiary and divesting itself of some of its holdings in unrelated industries. It's also chosen to make a shift in its fiscal year, and that prompted a slightly earlier report of financial results than most investors were expecting.

Three people talking at the front of a room with many monitors showing charts and numbers.

Image source: Getty Images.

That said, coming into the report, Jefferies investors had prepared for the impact that the market turmoil during the last part of 2018 would have on its key investment banking, capital markets, and asset management operations. The results confirmed the pressure that Jefferies is feeling, but it also gave hope that the financial company will be able to weather the storm.

A tough close to 2018

Jefferies' financial results reflected the difficult conditions in the markets. For the two months ending Nov. 30, the company saw net revenue of $806.6 million, which corresponded proportionally well to the $1.06 billion it brought in during the three-month period that ended 2017. However, Jefferies reported a net loss of $20.4 million, working out to $0.06 per share. That was better than the year-earlier loss, but that figure had been skewed sharply downward by the impact of tax reform.

The different parts of Jefferies Financial Group didn't all react the same way to market turbulence. The core Jefferies Group unit managed to post pre-tax income of $78 million, with strong performance from the division's investment banking business. Strategic efforts to boost fee-based revenue from investment banking have paid off in solid growth for the unit, and Jefferies has been pleased with what it's seen in that area.

However, the merchant banking side of Jefferies weighed on the company's overall results, reversing gains from the previous quarter. The segment suffered a pre-tax loss of $109 million, largely due to writedowns related to its holdings of consumer products company Spectrum Brands and foreign-exchange specialist FXCM. However, a higher valuation on Jefferies' investment in privately held shared-workspace company WeWork helped to offset those losses somewhat, and the company cited good contributions from its stakes in National Beef and Vitesse.

Moreover, even within Jefferies Group, there were signs of difficulty. Sales and trading results were weaker due to tough markets, with roughly similar declines in both the equity and fixed-income sides of the business. Yet the unit has reduced its leverage substantially, positioning itself well for the current environment.

What Jefferies sees for 2019

CEO Rich Handler and President Brian Friedman summed up 2018 very well. "A solid first half of the year was offset by a slower second half, particularly a lighter than expected fourth quarter," the executives said, "as the market turmoil dampened our trading results as well as our performance in asset management."

Yet the company is optimistic about its relative place in the overall industry. Handler and Friedman noted that many of Jefferies' primary competitors have gone through difficulties of their own, and they believe that the environment will lead to greater consolidation in the financial industry. That in turn could give Jefferies a chance to boost its market share, especially as it pushes to expand its presence in the investment banking segment.

Shareholders have seemed comfortable with Jefferies' long-term prospects despite turbulent markets, and the stock has recovered nicely during January following its December slump. With the company apparently well placed to enter 2019 with strong momentum, Jefferies has investors excited about its prospects for growth in the new year.

Check out all our earnings call transcripts.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Jefferies Financial Group Inc. The Motley Fool has a disclosure policy.

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