Jefferies Sees Markets Get Back to Normal

The financial-services company got a nice boost from recovering markets.

Dan Caplinger
Dan Caplinger
Jul 3, 2019 at 10:13AM
Financials

The market swoon in late 2018 took many investors by surprise and had a carryover effect on the business world coming into 2019. Jefferies Financial Group (NYSE:JEF) felt the pinch of that downturn three months ago when it reported its financial results from that period. At the time, many feared that the skepticism in the markets might blossom into a full-blown bear market.

Coming into Jefferies Financial Group's fiscal second-quarter financial report, investors wanted to see signs that the financial-services company had found a way to bounce back along with recovering markets. Jefferies' numbers indeed reflected the solid performance from the markets, and the company has high hopes that the remainder of the year will go smoothly, as well.

Picture of Wall Street sign in front of New York Stock Exchange.

Image source: Getty Images.

How Jefferies recovered from tough times

Jefferies Financial Group's fiscal second-quarter financial results were encouraging. Net revenue climbed 21%, to $1.10 billion, which was far better than the low-single-digit percentage growth rate that most of those following the stock had anticipated. A number of one-time items affected net income, but adjusted net income came in at $126.2 million, and that produced adjusted earnings of $0.41 per share. That came in well above the consensus forecast among investors for $0.24 per share.

The rebound on Wall Street was most evident in Jefferies Financial Group's financial-services business, which is called Jefferies Group. The unit saw a nearly 10% rise in revenue from year-ago levels and an even bigger gain of more than 30%, compared to what it brought in three months ago, and that lifted segment earnings by 12%, to $109.9 million.

Within the segment, the best performance came from sales and trading activities, where a 44% jump in fixed-income revenue and an 18% rise in equity-related revenue were instrumental in the unit's top-line growth. Meanwhile, investment-banking revenue slumped from year-earlier levels, due in part to a lag effect after the downturn late last year, but the numbers still bounced back strongly from the previous quarter. Asset management fee revenue nearly quadrupled, helping Jefferies Group further.

Elsewhere, the merchant-banking side of Jefferies Financial Group saw segment revenue more than double since last year, coming in at $187.3 million. The unit's $51.2 million in net income reversed a year-earlier loss of roughly the same amount, giving a nice boost to the overall company's bottom line.

CEO Rich Handler and corporate president Brian Friedman summed things up succinctly. "Overall investment banking results returned to more normal levels," the executives said, "although our investment banking advisory revenues were held back by the lag effect resulting from capital markets conditions in December and the U.S. government shutdown in December and January." However, Handler and Friedman noted that the capital-markets division continues to take market share away from competitors, and asset management is picking up steam.

Can Jefferies keep growing?

Jefferies sees plenty of opportunities for further growth. The company sees investment-banking activity continuing to build in the fiscal third quarter, with a sizable backlog of deals and a healthy environment for mergers and acquisitions, as well as leveraged finance. "Innovative electronic trading capabilities" should lift the capital-markets business, while a new platform will help the asset management unit build additional momentum.

Jefferies also continued to repurchase its own stock aggressively. The company spent another $150 million to buy back 7.8 million shares, paying an average of $19.33 per share. With a recent upgrade of the company's bond rating, Jefferies believes that it should continue to be in a good position to make additional repurchases, and it has $336 million left in authorized buyback funds available for future use.


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Shareholders were happy with the rebound that Jefferies posted, and the stock climbed between 2% and 3% in pre-market trading following the announcement. As long as markets behave, Jefferies Financial Group seems to be moving in the right direction, and it has plenty of potential to pick up more business from its rivals in the future.