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Fourth-quarter earnings season begins in earnest this week, and one of the first major financial firms to post earnings, investment bank Jefferies Financial Group (NYSE:JEF), did not perform as well as expected.

The firm missed analyst estimates for revenue and earnings, but there were some bright spots and some hope for improved results in 2024. Jefferies stock was down about 1% in morning trading on Tuesday.

Uptick in investment banking

For its fiscal fourth quarter, which ended Nov. 30, Jefferies posted $1.2 billion in revenue, down 17% year over year. The consensus among analysts was $1.24 billion in revenue. Net earnings for the quarter fell 53% to $66 million, or 29 cents per share, which was below consensus estimates of 34 cents per share.

The major drag on earnings was a 204% year-over-year increase in preferred stock dividend payouts to $6.3 million.

For the full year, Jefferies saw a 21% decline in revenue to $4.7 billion, while its net earnings fell 66% to $263 million.

The lower numbers are not surprising, given that Jefferies generates most of its income from investment banking. Additionally, mergers and acquisitions were down 14% in 2023, while the value of deals was 41% lower than the previous year.

For Jefferies, investment-banking revenue was down 5% in fiscal 2023 to $4.5 billion. However, the fiscal fourth quarter showed promising signs for the company as its investment-banking revenue was up 1% to $1.1 billion.

Putting things into historical perspective, CEO Richard Handler and President Brian Friedman said the numbers were not that bad.

“However, if you go back to 2019, which is more indicative of the last ‘normal’ year in our industry, our current results compare strongly with Investment Banking net revenues of $1.6 billion in 2019 and equities and fixed income net revenues of $1.5 billion,” they said.

Glass-half-full view

Thus, investors can either take the glass-half-empty or the glass-half-full view of Jefferies earnings, but there are some bright spots on the horizon.

Jefferies has been using the lull in activity to bulk up its roster of managing directors, which are the individuals who build relationships and do deals. Over the past three years, it has added 182 managing directors and now has 364 after rapid expansion in Europe, up 78%, and Asia-Pacific, up 150%.

Jefferies’ leadership views 2023 as both a transition year and a trough year for investment banking, as 2024 is expected to be significantly better, driven by reduced inflation, the expectation for lower interest rates and lots of pent-up demand.

“In our combined 55+ years at Jefferies, we have never seen our firm better positioned, and we have a straightforward path for our unique global franchise to deliver excellent long-term total returns to our shareholders, with lower-risk investment banking revenue driving our growth, a diversified sales, trading and research platform serving our clients and the foundation of a strong alternative asset management business,” Handler and Friedman said in the firm’s 2023 shareholder letter.

Leadership did not offer guidance, but the consensus among analysts calls for a $47-per-share price target, which would be about a 15% increase over its current $40-per-share price.

Jefferies’ stock price finished the year up 27%, and most of that came in the last two months of the year, driven mainly by what was viewed as a more accommodative stance on interest rates by the Federal Reserve. The firm’s price-to-earnings (P/E) ratio shot up to 29 based on the late 2023 run-up, but the forward P/E is a more reasonable 10, as the market expects its earnings to improve in 2024.

Bottom line: Jefferies looks pretty attractive heading into 2024.



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