Jefferies, Proving To Be Rainmakers' Alternative (JEF, BAC, GS)

Jefferies Group Inc. (NYSE: JEF) has started to be viewed as one of Wall Street’s beneficiaries of all the financial turmoil.  It isn’t that the company is immune to the woes of the market. Our discussions with employees and customers of brokerage firms to the likes of Bank of America Corporation (NYSE: BAC), Goldman Sachs Group Inc. (NYSE: GS), and others have indicated that rainmakers are far less resistant to going to firms that are not under the TARP and are not under the waves of controversies.

The notion that Jefferies was profitable and was in no way any part of being a government bailout is starting to make the broker and investment banking firm one of the likely destinations for brokers, advisors, traders, and other rainmakers.  Many of these individuals have no responsibility in the malaise that ruined the markets and many of these employees want to get away from having their financial incentives cut down to government-level pay.  As we have said, “No one got into the financial business to work for the government nor for a ‘.org’ entity.”

The firm posted earnings of $0.19 rather than staying consistent with the prior year’s period loss when its EPS loss was -$0.45.  The firm’s net revenues were $347.26 million after the interest on mandatorialy redeemable preferred interest of consolidated subsidiaries took out $5.3 million.  We had estimates from Thomson Reuters as -$0.08 EPS and revenue of $287.5 million.  Trading revenue was a winner here at $152.3 million as volatile markets created opportunities it was able to profit from. Some aspects of the business have been soft as losses on debt trading, investment banking revenues, and broker commissions and management fees have all been running softly.

The trading side was the winner here under its principal transactions.  But this also begs the question as to whether or not analysts will start to raise estimates for the coming quarter after we get further into the period.  The consensus estimate for the June quarter is for it to post a loss of -$0.03 EPS on some $290.4 million in revenues.  It was only a week ago that Pali started the firm with a “Sell” rating.

The brokerage firm and investment bank also noted that its March 31, 2009, common stockholders’ equity amounted to $2.1 billion, and that in turn resulted in book value of $12.23 per common share.  After a 14% gain this morning, shares are trading at $16.28.  Its 52-week trading range is $7.97 to $29.00.

Its relatively untarnished reputation also offers rainmakers to go work at an institution where they aren’t having to look out for Uncle Sam nor have to hide when they say who they work for.  The brokerage and middle-market firm’s results have not been immune, but the earnings are so far coming through for shareholders.

As far as attracting new brokers, these firms cannot just directly go after each other’s team rosters as there are anti-raiding provisions.  But many are expressing how there is just no longer the upside or prestige of working for the big firms that are under the government’s thumb.  Again, we are speaking of the people who had nothing to do with the current market malaise.  And also again, “No one got into the financial business to work for the government nor for a ‘.org’ entity.”

JON C. OGG