Big banks are always among the first companies to report earnings every quarter. As banks are seen as bellwethers for the economy, investors can get a sense of what to expect from other sectors of the economy based on bank earnings. But there is one stock that might be considered a bellwether for the bellwethers -- Jefferies Financial (JEF 1.67%).
Jefferies is a leading investment bank, and it reports earnings weeks before other big investment banks like Goldman Sachs (GS 2.76%), Morgan Stanley (MS 1.31%), and JPMorgan Chase (JPM 0.60%). That's because its quarter ends one month earlier than those other banks -- in this case, May 31.
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So while it might not be a total apples-to-apples comparison to the other banks, Jefferies results can certainly give investors a sense of how the quarter went for the other major banks, perhaps providing intel on whether they should buy leading up to earnings season.
So how did Jefferies do? Here are some takeaways.
Earnings miss and a mixed bag
Jefferies' fiscal second-quarter earnings, released June 24, were a mixed bag. Net earnings grew a solid 5% year over year to $226 million, or $1.02 per share, but it was short of estimates of $1.16 per share. Revenue also missed estimates, despite rising 37% year over year to $2.21 billion. Analysts anticipated $2.22 billion.
The miss was the primary reason that Jefferies stock dropped about 8% the next day, June 25.
NYSE: JEF
Key Data Points
The earnings and revenue, while strong, missed estimates due to weak asset management numbers. Asset management revenue tumbled 46% to $188 million in the quarter due to a difficult stock market environment from March through May. Also, it took a hit from losses by its subsidiary, Point Bonita, which had significant exposure to First Brands Group, a company that went bankrupt last fall.
But on the plus side, Jefferies had blowout investment banking results.
Blowout investment banking revenue
Investment banking, Jefferies' bread and butter, had a record quarter. This should get the attention of investors looking at earnings for Goldman Sachs and Morgan Stanley next month.
Investment banking revenue surged to $1.2 billion, a 58% increase year over year. It was a record quarter for Jefferies, led by advisory and equity underwriting. It also had a strong quarter in capital markets as revenue rose 13% to $799 million. Combined, capital markets and investment banking revenue increased 37% year over year to a record $2 billion.
While the quarter may have been a mixed bag for Jefferies, it was good news for other investment bank stocks and their investors. Obviously, the record investment banking and capital markets hauls indicate that this will be a strong quarter for the large investment banks.
Additionally, the downside of this report for Jefferies, asset management, won't translate to the other competitors. That's because Jefferies' asset management results include March, a terrible month for stocks. Goldman Sachs', Morgan Stanley's, and JPM's quarters won't include March and will start with the recovery rally in April.
Also, a big part of Jefferies' asset management hit was from its Point Bonita exposure to First Brands. The other companies won't have that drag. So Q2 should be a good one for the investment banks.
