Shares of Jefferies Financial (NYSE:JEF) were sinking on Thursday after the investment bank underperformed in the fiscal first quarter ended February 27 relative to analysts’ estimates.
Jefferies results may have broader significance as it is the first investment bank to report first quarter results. Its quarter ends at the end of February, as opposed to the end of March for the other big investment banks due to report in mid-April.
So, while the results may not align exactly with what Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), JPMorgan Chase (NYSE:JPM) and the others report, they could be a warning sign for investors.
All of the major investment bank stocks were trading lower on Thursday, with shops like Lazard (NYSE:LAZ) and Evercore (NYSE:EVR) among the hardest hit, down 3% and 4%, respectively.
Big Revenue and Earnings Miss in Q1
Jefferies reported revenue of $1.59 billion in the fiscal first quarter, down 8.6% from the same quarter a year ago. It was also way below estimates of $1.88 billion.
Net earnings came in at $127.8 million, or 57 cents per share, which was down 14.6% year-over-year. The consensus among analysts called for earnings of 94 cents per share.
These results are a steep come down from blowout fourth quarter results when Jefferies generated revenue of $1.96 billion and earnings of 91 cents per share.
In the first quarter, Jefferies revenue from investment banking dropped about 4% year over year to $700.7 million. That’s also way down from Q4, when investment banking made $987 million, a 73% year-over-year increase.
While advisory and debt underwriting was up year-over-year, equity underwriting took a big hit, with revenue falling 39% to $128.5 million. Management said the “opportunity in the current year in sectors where we have more meaningful market share was down notably from the prior year’s comparable period.”
Also, capital markets revenue fell about 4% to $698.3 billion, while asset management revenue plummeted 30% year-over-year to $191.7 million.
The declines are due to a slumping stock market and sputtering economy, with uncertainty surrounding rates and inflation.
“The capital markets have become increasingly more challenging due to the uncertainties that have arisen around U.S. policy and geopolitical events,” CEO Richard Handler and President Brian Friedman said. “There remains strong dialogue around potential investment banking transactions (capital raising and advisory) and our high-quality backlog continues to build. Its realization depends on confidence and visibility reemerging, which may be beginning.”
Bellwether for Other Banks?
Banks are typically bellwethers for the state of the economy. When the economy is strong, banks usually do well because more people and businesses are borrowing, lending, and investing. When the economy slows, banks usually slow down as well.
Jefferies is not a consumer bank, but it is a bellwether for the state of M&A and investment banking activity. So, it will be interesting to see how its competitors perform. It also bears watching what the economy does over the next few quarters to get a read on where M&A is headed.
“We remain very confident about our strategy, our team and our long-term growth opportunities across our global businesses and we will navigate this period of uncertainty the way we always do, by focusing on our clients and helping them address their challenges and opportunities, while watching our risk, maintaining record liquidity and striving to gain market share across our firm,” Handler and Friedman said.
Analysts at Morgan Stanley have lowered Jefferies price target twice in the past two weeks, dropping it again on Thursday to $75 per share. But it still has a buy rating and Morgan Stanley sees 36% upside from its $55 per share price. Oppenheimer also reduced the target, viewing the rebound in M&A as delayed.
Today’s dip is enticing because Jefferies is a good stock at a fairly cheap price. But things seem a bit too murky right now to get a good read on its near-term future.