Investors have to know what exposure their companies have to certain unexpected events, even if it's well beyond the core business on which a given company focuses the bulk of its attention. For Jefferies Financial Group (NYSE:JEF), what drives most of the financial company's results is the success of its investment banking and asset management businesses, which in turn tend to rise and fall with market sentiment. However, Jefferies has some other holdings that most would consider not to be core to its primary business -- and when something happens to them, investors learn the hard way what the impact on the entire company can be.

Coming into Jefferies Group's fiscal third-quarter financial report on Sept. 26, few investors foresaw anything that would disrupt a fairly benign environment for financial markets overall. However, Jefferies' writedown of its investment in WeWork parent The We Company had a negative impact on its results, and shareholders weren't happy to see just how big the consequences were.

We didn't work for Jefferies

Jefferies Financial Group's fiscal third-quarter financial results didn't live up to expectations. Net revenue fell more than 25% to $856.8 million, which was far worse than the $1.07 billion in revenue that most of those following the stock had hoped to see. Net income was down almost 75% to $48.5 million, and the resulting earnings of $0.16 per share fell far short of the consensus forecast among investors for $0.42 per share.

Wall and Broad Street signs on a pole with two American flags and buildings in the background

Image source: Getty Images.

The first thing that Jefferies called out in its financial release was the impact of its investment in The We Company. The financial company took a $146 million non-cash charge to net income in order to reflect its fair value reduction of its holdings in the WeWork parent. Jefferies was quick to point out that even with the charge, its investment in We has been successful, with an initial $9 million investment resulting in $31 million in cash payments back along with a 0.8% stake in the company going forward.

More important to Jefferies' long-term prospects were the results from the core part of its business. The financial services segment saw net revenue come in roughly flat year over year, with net income sliding 5% over the same period. Revenue from sales and trading was up 10%, lifted largely by stronger equity market performance. Advisory revenue also grew, but weakness in the capital markets segment led to falling revenue from investment banking. Asset management contributed a small but important boost as well.

Beyond WeWork, Jefferies' merchant banking business did reasonably well. The company's remaining interest in National Beef benefited from strong performance, and Jefferies realized a gain from the purchase of HomeFed. However, the WeWork fair value adjustment more than offset good results elsewhere within the segment.

What's ahead for Jefferies?

CEO Rich Handler and President Brian Friedman kept their eyes on the long run. "2019 is proving to be a year of solid progress," the executives said, "on our strategy of simplifying Jefferies Financial Group to focus on Investment Banking, Capital Markets and Asset Management." The executives also pointed to efforts to cut its share count and return capital to shareholders as important to its overall strategy.

One key element of that strategy was Jefferies' recent special dividend, in which it distributed its roughly $450 million stake in Spectrum Brands to Jefferies' shareholders. The financial company also has $330 million left in authorized stock repurchase capacity, but buyback activity slowed dramatically during the quarter, with Jefferies spending just $8 million.

Shareholders weren't pleased to see the impact that WeWork's debacle had on Jefferies' results, but much of the drop in the share price following the announcement was due to the downward impact that the Spectrum Brands special dividend had. Hopefully, with the one-time impact of WeWork behind it, Jefferies will be able to refocus its efforts on taking advantage of financial market conditions as long as they remain favorable.