Richard Handler, CEO of Jefferies Financial Group
Peter Foley/Bloomberg
Jefferies Financial Group may be first among investment banks to report earnings each quarter, but it is rarely the first to come to mind when people think of Wall Street.
With a market value of $8.4 billion, Jefferies (ticker: JEF) is less than a tenth the size of Goldman Sachs Group (GS) or Morgan Stanley (MS). Yet this well-managed investment bank is increasingly able to take on its bigger, better-known rivals. And there’s plenty of growth potential in the stock, even after a 38% gain this year.
The firm’s reputation as a scrappy upstart is personified by its CEO, Rich Handler, who came out of the rough-and-tumble culture at Drexel Burnham Lambert. He has been CEO for 20 years, making him one of the longest-tenured leaders on Wall Street.
“Jefferies is aggressive and opportunistic on behalf of clients every minute of every day,” says Larry Pitkowsky, manager of the GoodHaven mutual fund, a Jefferies shareholder. “Handler is an owner-manager who’s passionately committed to growing the value of the business.” Handler, 60, owns 7% of the company.
The CEO says the image of the firm is outdated. “Call us scrappy, or a company that broke into the big time through our relationships, creativity, hard work, and tenacity,” Handler tells Barron’s.
“We are owners and think like owners and act like owners,” Handler adds. “And we are long-term oriented in our approach.” Jefferies has bought back about 30% of its stock since early 2018.
The stock trades around $34, or 1.1 times tangible book value and 11 times forward earnings. It yields 2.9% after a recent 25% increase in the dividend.
Jefferies earned $1.30 a share in its fiscal second quarter ended in May and is expected to net nearly $5 a share this year. On a November fiscal year, Jefferies reports its earnings a month earlier than peers that have December fiscal years. The consensus for 2022 is just $3 a share, on par with 2019, as analysts see less robust investment banking activity. That estimate seems too pessimistic, given Jefferies’ improving franchise.
“Jefferies is a rarity in financial services, a mid-cap growth company,” says Chris Kotowski, an analyst at Oppenheimer who has an Outperform rating and a price target of $40 on the shares. “Handler has leaned into every crisis or industry pullback and hired investment bankers.”
The result is that Jefferies is a major player in investment banking. It has risen to sixth in merger advisory work so far this year from 11th in 2018, behind JPMorgan Chase (JPM), Goldman Sachs, Morgan Stanley, Bank of America (BAC), and Citigroup (C), according to Dealogic.
Jefferies’ market share exceeds that of Barclays (BCS), Credit Suisse Group (CS), and other European banks. Part of the bull case for Jefferies is that it will benefit from the pullback of European banks from the U.S. capital markets.
Its roster of investment banking clients includes Carl Icahn and Tilman Fertitta, a billionaire with interests in gambling, restaurants, hotels, and the Houston Rockets pro basketball team. The Fertitta relationship paid off in the past year. Jefferies was the investment banker for the merger of Fertitta’s Golden Nugget online gambling business with a special purpose acquisition company, or SPAC, in December, and it was the banker to Golden Nugget Online Gaming (GNOG) when DraftKings (DKNG) recently agreed to buy the company.
Battling the Bulge Bracket
How Jefferies stacks up against other midtier investment banks.
| Company / Ticker | Recent Price | YTD Change | Market Value (bil) | 2021E EPS | 2021E P/E | 2022 EPS | 2022E P/E | Dividend Yield | Price/Tangible Book Value |
|---|---|---|---|---|---|---|---|---|---|
| Jefferies Financial Group / JEF* | $33.98 | 38.1% | $8.4 | $4.85 | 7.0 | $3.06 | 11.1 | 2.9% | 1.1 |
| Cowen / COWN | 35.43 | 36.3 | 1.0 | 8.73 | 4.1 | 6.22 | 5.7 | 1.1 | 1.2 |
| Evercore / EVR | 130.36 | 18.9 | 5.2 | 12.80 | 10.2 | 12.56 | 10.4 | 2.1 | 5.1 |
| Lazard / LAZ | 45.62 | 7.9 | 5.1 | 4.51 | 10.1 | 4.69 | 9.7 | 4.1 | 10.6 |
| Piper Sandler / PIPR | 137.50 | 38.6 | 2.5 | 17.40 | 7.9 | 13.58 | 10.1 | 1.6 | 3.3 |
E=estimate; *Fiscal year ends in November
Sources: Bloomberg; company reports
“Our view is that the capital markets environment will be stronger for longer, and Jefferies is positively geared to that trend,” says Michael Brown, a Keefe, Bruyette & Woods analyst with an Outperform rating on the stock and a $39 price target. Jefferies is strong in merger advisory work, equity underwriting, and high-yield financing.
It also has a merchant-banking portfolio of businesses that include real estate and energy. Valued at about $2.7 billion, they are a legacy of its 2013 merger with Leucadia National. While some investors would like to see Jefferies unload these assets quickly, the firm is in no hurry.
“The same people who want us to sell now said we should sell our beef company for $900 million and we got $3 billion,” Handler says. “We are going to optimize value.”
The bullish math on Jefferies stock is that the bank could be worth $35, or 12 times a conservative 2022 estimate, plus $10 a share for the merchant bank, for a total of $45 a share. “We see a lot of runway to keep building,” Handler says. “We’re still at a very early stage of building our company.”
Write to Andrew Bary at [email protected]
