The stars are aligning for Jefferies. The second-tier firm announced a 37 percent gain in quarterly profit, news that sent its shares up by as much as 10 percent. The investment bank now finds itself trading at a juicy 1.7 times book value. That’s way ahead of bigger rivals. How has Jefferies managed that?
Some of it is down to what Jefferies isn’t rather than what it is. It isn’t weighed down by the problems that have beset its better-known brethren. JPMorgan’s investment bank is performing well, but its retail bank is still heavily exposed to the wobbly U.S. consumer. Goldman Sachs , meanwhile, stands accused of fraud and is everyone’s favorite bad boy. Morgan Stanley still needs to convince investors it’s back on track after a year of losses.
Nor does Jefferies have as much to lose from looming new regulation. For example, it has no fixed-income derivatives business to speak of. All in, these sorts of albatrosses have left Goldman, JPMorgan and Morgan Stanley trading just above or below book value.
But Jefferies is also making some of its own luck. For one, it’s expanding, after executives decided two years ago to take advantage of the bulge bracket’s pain to grow the trading and advisory arms. The move looks to be paying off, for now at least. On the second-quarter earnings call, management cheerfully trumpeted the increasing number of debt, equity and M&A deals the firm has been handling.
Jefferies has managed to get out in front in another way too. It switched its financial reporting from a calendar year-end to a November year-end, allowing it to release earnings a month before the big boys, rather than being largely forgotten as an afterthought.
But there was a bit of jiggery-pokery too. Changing the calendar allowed for some double counting. Jefferies’ second-quarter numbers included March, the industry’s best month of the year, and one that also figured in its results for the first quarter. It was well-flagged, but Jefferies was remarkably reluctant to provide more details.
Investors didn’t seem to care much about Jefferies’ reticence, and also shrugged off any fears the firm’s build-up could be temporary. It’s the most recent results that count.