Jefferies Group Inc. (JEF, Financial) is a global securities and investment banking group that has served corporate clients, institutional investors and high net worth individuals for 50 years and has operations in 30 cities around the world. It is also a full 90.997% of investment company Leucadia’s (LUK, Financial) portfolio as of June 30, and they have been buying even more Jefferies stock in November. Leucadia’s portfolio is run by guru Ian Cumming, along with Joseph Steinberg, who are great investors. Leucadia experienced 10-year cumulative book value growth of 292.7%, compared to 16.4% for the S&P 500.
Jefferies also appealed to Bruce Berkowitz, who liked it enough to buy 4,123,711 shares at an average price of $22.58 in the second quarter of 2011, while he was selling other stocks. Though the stock has fallen 46% year to date, something about the company keeps these gurus hanging on.
Though often considered a smaller version of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), which seeks good companies at cheap prices and holds “forever,” Cumming and Steinberg invest in deep value situations in distressed or out of favor assets, within their circle of competence. After acquiring almost complete control of a company, they will turn it around and sell it – often for outsized profits.
Such is the case with Jefferies. Leucadia entered the scene at the height of the credit crisis in April 2008. It exchanged 10 million Leucadia common shares for 26,585,310 Jefferies common shares and $100 million in cash. Not until the fourth quarter of 2010 did they add 766,000 more shares at about $24.74, and then 5,154,639 more in the second quarter of 2011. Cumming and Steinberg agreed not to sell their shares for two years and became members of the board.
From 2007 to 2008, Jefferies was in a highly distressed situation. Its revenue was more than cut in half, from $2.7 billion to $1.7 billion. In 2007 it lost $1.1 billion and $1.8 million in 2008. Chairman and chief executive officer of Leucadia, Richard Handler, asserted that financial distressed was not the reason for the partnership with Leucadia: ““Although our balance sheet and liquidity are solid, in light of the general environment and recent events, we believe it is prudent to strengthen further our foundation as we look to take advantage of the many opportunities we see in the current market environment. We could not ask for better long-term partners than Joe and Ian," he said.
The company soon implemented a restructuring plan in which it reduced headcount by 18%, closed foreign offices, reduced operating expenses, amended stock-based compensation for active employees and changed compensation plans, among other measures. It completed the plan by the end of 2008. The team that headed up the restructuring effort was comprised of three members of Jefferies & Company Inc., the principal operating subsidiary of Jefferies Group Inc.
Executing the plan seemed to cause Jefferies to emerge from the ashes entering 2009 – it increased 65.5% that year, or from $14.50 to $24 per share.
Prior to 2008, Jefferies was a growing company. Its revenue increased from $785 million in 2001 to $2.7 billion in 2007. Its cash holdings had increased from $296 million to $2.3 billion in the same span of time, though debt more than doubled from $14 billion in 2006 to $29.8 billion in 2007. The company had only had two years of positive cash flow, however, in 2001 and 2005.
When the firm began in the 1960s, it initially found a niche trading large blocks of stock for institutional investors who did not want to impact the stock market. The firm says that it “pioneered what came to be known as third-market trading.” By the 1990s, it expanded its capabilities into high-yield bonds and formed investment banking, research and asset management efforts. In the 2000s it burgeoned into a full-service investment bank with an expertise in advisory and equity and debt capital markets activities across a variety of sectors. Jefferies is now among the top ten in virtually all of its businesses.
Leucadia told investors in 2008 some of why it found Jefferies a worthwhile investment in the midst of economic meltdown: “Jefferies is not in trouble, not a ward of the U.S. Government, not burdened by toxic assets and not overleveraged. Its employees own a substantial interest in the firm and their pay expectations are being managed with the best interests of the firm in mind. Jefferies has successfully hired talented individuals from troubled or failing firms and recently acquired a muni trading and underwriting business. Trading volumes have been good, their restructuring business busy, but their capital markets and mergers and acquisition businesses remain lethargic. This will inevitably improve, but timing is uncertain.”
Jefferies also had management that Leucadia admired. Leucadia told investors that year that they were “particularly fond of” and held “in high regard” its long-time CEO, Richard B. Handler. Handler has been Jefferies’ chairman since February 2002, and became CEO in January 2001. He was first elected to the board in 1998, and was managing director of high yield capital markets, a group he co-founded in April 1990, from May 1993 to February 2007. Handler holds an MBA from Stanford University and runs a non-profit that helps underprivileged children.
Leucadia had also worked with Handler for a reassuringly long time. In 2000, the two companies formed a joint venture to trade high-yield debt. They invested $100 million and made an average return of 20% per annum over the next seven years. Another joint venture took place in 2007, which involved a broker-dealer business engaged in the secondary sales and trading of high-yield and special situation securities.
Though the stock returned to pre-2007 levels in 2010, Bruce Berkowitz probably took advantage of the falling price in 2011 to purchase his shares. However, he was slightly early, as the stock fell ever further and trades in the low teens in the third quarter.
The stock price has been affected primarily by questions about the firm’s exposure to euro zone sovereign debt. On November 1, it issued a statement confirming that it has no meaningful exposure to the sovereign debt of Portugal, Italy, Ireland, Greece and Spain. On November 7, they issued a second release announcing that it had cut its trading positions in the sovereign securities of Portugal, Italy, Ireland, Greece and Spain by 49.5%, of $1.1 billion long and $1.1 billion short. Its current net exposure to the sovereign securities its $59 million, or 1.7% of shareholder equity, with negligible market or credit risk.
Assuaging investor worry was particularly necessary as another firm, MF Global, collapsed after a $6.3 billion bet on European sovereign debt.
In spite of its falling share price, Jefferies has its strongest balance sheet ever, with approximately $20 billion in cash and long term liabilities and debt of $4.9 in debt. Revenue increased from $2.5 billion in 2009 to $2.8 billion in 2010, with 9.7% annual 10-year growth. [revenue growth chart]
Return on equity decreased from 11.4% in 2009 to 8% in 2010; return on assets decreased from 1% to 0.6%. The company also lost $376 million in 2009 and $490 million in 2010.
On Jefferies’ third-quarter conference call, Handler acknowledged that the company had faced a “challenging environment,” but that that Jefferies’ balance sheet had a leverage ratio similar to what it had in 2008 when the company survived the credit crisis without government aid. “More important than any ratios, we have a significantly more diversified global business in 2011, which enjoys an enhanced competitive position,” he said. “We do not know when the volatility in the financial system will normalize, but eventually it will.”
Jefferies also appealed to Bruce Berkowitz, who liked it enough to buy 4,123,711 shares at an average price of $22.58 in the second quarter of 2011, while he was selling other stocks. Though the stock has fallen 46% year to date, something about the company keeps these gurus hanging on.
Though often considered a smaller version of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), which seeks good companies at cheap prices and holds “forever,” Cumming and Steinberg invest in deep value situations in distressed or out of favor assets, within their circle of competence. After acquiring almost complete control of a company, they will turn it around and sell it – often for outsized profits.
Such is the case with Jefferies. Leucadia entered the scene at the height of the credit crisis in April 2008. It exchanged 10 million Leucadia common shares for 26,585,310 Jefferies common shares and $100 million in cash. Not until the fourth quarter of 2010 did they add 766,000 more shares at about $24.74, and then 5,154,639 more in the second quarter of 2011. Cumming and Steinberg agreed not to sell their shares for two years and became members of the board.
From 2007 to 2008, Jefferies was in a highly distressed situation. Its revenue was more than cut in half, from $2.7 billion to $1.7 billion. In 2007 it lost $1.1 billion and $1.8 million in 2008. Chairman and chief executive officer of Leucadia, Richard Handler, asserted that financial distressed was not the reason for the partnership with Leucadia: ““Although our balance sheet and liquidity are solid, in light of the general environment and recent events, we believe it is prudent to strengthen further our foundation as we look to take advantage of the many opportunities we see in the current market environment. We could not ask for better long-term partners than Joe and Ian," he said.
The company soon implemented a restructuring plan in which it reduced headcount by 18%, closed foreign offices, reduced operating expenses, amended stock-based compensation for active employees and changed compensation plans, among other measures. It completed the plan by the end of 2008. The team that headed up the restructuring effort was comprised of three members of Jefferies & Company Inc., the principal operating subsidiary of Jefferies Group Inc.
Executing the plan seemed to cause Jefferies to emerge from the ashes entering 2009 – it increased 65.5% that year, or from $14.50 to $24 per share.
Prior to 2008, Jefferies was a growing company. Its revenue increased from $785 million in 2001 to $2.7 billion in 2007. Its cash holdings had increased from $296 million to $2.3 billion in the same span of time, though debt more than doubled from $14 billion in 2006 to $29.8 billion in 2007. The company had only had two years of positive cash flow, however, in 2001 and 2005.
When the firm began in the 1960s, it initially found a niche trading large blocks of stock for institutional investors who did not want to impact the stock market. The firm says that it “pioneered what came to be known as third-market trading.” By the 1990s, it expanded its capabilities into high-yield bonds and formed investment banking, research and asset management efforts. In the 2000s it burgeoned into a full-service investment bank with an expertise in advisory and equity and debt capital markets activities across a variety of sectors. Jefferies is now among the top ten in virtually all of its businesses.
Leucadia told investors in 2008 some of why it found Jefferies a worthwhile investment in the midst of economic meltdown: “Jefferies is not in trouble, not a ward of the U.S. Government, not burdened by toxic assets and not overleveraged. Its employees own a substantial interest in the firm and their pay expectations are being managed with the best interests of the firm in mind. Jefferies has successfully hired talented individuals from troubled or failing firms and recently acquired a muni trading and underwriting business. Trading volumes have been good, their restructuring business busy, but their capital markets and mergers and acquisition businesses remain lethargic. This will inevitably improve, but timing is uncertain.”
Jefferies also had management that Leucadia admired. Leucadia told investors that year that they were “particularly fond of” and held “in high regard” its long-time CEO, Richard B. Handler. Handler has been Jefferies’ chairman since February 2002, and became CEO in January 2001. He was first elected to the board in 1998, and was managing director of high yield capital markets, a group he co-founded in April 1990, from May 1993 to February 2007. Handler holds an MBA from Stanford University and runs a non-profit that helps underprivileged children.
Leucadia had also worked with Handler for a reassuringly long time. In 2000, the two companies formed a joint venture to trade high-yield debt. They invested $100 million and made an average return of 20% per annum over the next seven years. Another joint venture took place in 2007, which involved a broker-dealer business engaged in the secondary sales and trading of high-yield and special situation securities.
Though the stock returned to pre-2007 levels in 2010, Bruce Berkowitz probably took advantage of the falling price in 2011 to purchase his shares. However, he was slightly early, as the stock fell ever further and trades in the low teens in the third quarter.
The stock price has been affected primarily by questions about the firm’s exposure to euro zone sovereign debt. On November 1, it issued a statement confirming that it has no meaningful exposure to the sovereign debt of Portugal, Italy, Ireland, Greece and Spain. On November 7, they issued a second release announcing that it had cut its trading positions in the sovereign securities of Portugal, Italy, Ireland, Greece and Spain by 49.5%, of $1.1 billion long and $1.1 billion short. Its current net exposure to the sovereign securities its $59 million, or 1.7% of shareholder equity, with negligible market or credit risk.
Assuaging investor worry was particularly necessary as another firm, MF Global, collapsed after a $6.3 billion bet on European sovereign debt.
In spite of its falling share price, Jefferies has its strongest balance sheet ever, with approximately $20 billion in cash and long term liabilities and debt of $4.9 in debt. Revenue increased from $2.5 billion in 2009 to $2.8 billion in 2010, with 9.7% annual 10-year growth. [revenue growth chart]
Return on equity decreased from 11.4% in 2009 to 8% in 2010; return on assets decreased from 1% to 0.6%. The company also lost $376 million in 2009 and $490 million in 2010.
On Jefferies’ third-quarter conference call, Handler acknowledged that the company had faced a “challenging environment,” but that that Jefferies’ balance sheet had a leverage ratio similar to what it had in 2008 when the company survived the credit crisis without government aid. “More important than any ratios, we have a significantly more diversified global business in 2011, which enjoys an enhanced competitive position,” he said. “We do not know when the volatility in the financial system will normalize, but eventually it will.”
