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UPDATE: Jefferies 4th-Quarter Profit Rose 48%, Trading Revenue Surges

Dec 18, 2012 12:09:34 (ET)

--Jefferies fourth-quarter profit climbs as trading revenue jumps

--Fed's QE3 Program "translated into reasonably robust trading volumes," CEO says

--Firm sees potential for strong second quarter of M&A activity

--Knight stake generated four cents in per-share earnings during the period.

(Adds information on trading activity, investment banking revenue, Knight position, employee headcount, compensation and CEO comments throughout.)


By Brett Philbin

Jefferies Group Inc.'s (JEF) fiscal fourth-quarter profit rose 48% as trading revenue at the investment bank jumped, rebounding from a year-ago period that was dented by questions about the firm's European exposure.

Shares of Jefferies rose 2.4% to $18.68 as results exceeded analysts' estimates. The company's stock has climbed 36% year-to-date.

Jefferies, which last month agreed to be acquired by Leucadia National Corp. (LUK), benefited from another round of the Federal Reserve's bond-buying program, which helped double the firm's fixed income trading revenue from a year earlier to $293 million and boost overall trading revenue by 64% to $469.6 million.

During a conference call with analysts, Jefferies Chairman and Chief Executive Richard Handler said the Fed's so-called QE3 program "translated into reasonably robust trading volumes for much of the quarter which in turn resulted in solid revenues for our mortgage, international and domestic credit and rates businesses."

Jefferies was also helped by a relatively easy comparison to the year-ago quarter. The firm's earnings and revenue plunged a year ago amid worries that the company might go under because of its exposure to the debt issued by weaker European governments. An outsize bet on those securities helped lead to rival MF Global Holdings Ltd.'s (MFGLQ) bankruptcy last year.

Jefferies, the first U.S. investment bank to report fourth-quarter results, is often viewed as an early indicator of the financial results from larger rivals, though its fiscal period ends a month earlier than those firms. The largest investment banks are scheduled to announce quarterly results in mid-January.

Overall for the quarter ended Nov. 30, Jefferies reported a profit of $72 million, or 31 cents a share, up from $48 million, or 21 cents a share, a year earlier. Excluding merger-related costs, a year-earlier debt-extinguishment-related gain and other items, adjusted earnings were 35 cents.

Revenue climbed 37% to $760.6 million.

Analysts polled by Thomson Reuters had expected earnings of 32 cents on revenue of $723 million.

Jefferies was again helped by its large stake in Knight Capital Group Inc. (KCG), which contributed $48.7 million, or four cents, to its principal transactions revenue, down from $103.3 million, or eight cents, in the prior period.

In August, Jefferies led a consortium of financial firms in providing a $400 million lifeline to Knight after a costly technology snafu. The transaction made it the firm's largest stockholder, with a roughly 23% stake.

Jefferies recorded a gain on the Knight position as the brokerage's stock climbed 22% during the period. Knight's shares were boosted by speculation it would be acquired by competing suitors Getco LLC and Virtu Financial LLC.

While bond trading for Jefferies was resilient for September and much of October, Mr. Handler said activity "slowed for the U.S. Presidential election and for the remainder of our fiscal year," though he said "activity and volumes have been solid for the first few weeks of December."

Financial results at Jefferies, along with all of its banking peers, have been hampered by a weak economy and tougher regulations for the past two years.

In one sign of the difficult operating environment, Jefferies posted $84.3 million in advisory revenue, down 51% from a year ago and was the lowest revenue for the business in nearly two years.

Jefferies's investment banking revenue though, climbed 8.3% to $282.3 million as the company completed 145 capital markets transactions during the period, up from 107 a year ago.

On the conference call, Jefferies Executive Committee Chairman Brian Friedman said that assuming lawmakers resolve the looming U.S. "fiscal cliff" issue, the ingredients are in place for a strong second quarter of merger and acquisition activity. The "fiscal cliff" term refers to the combination of tax increases and spending cuts that could tip the U.S. economy back into a recession.

The fourth quarter is likely Jefferies's last as a standalone, public company, as it agreed to be acquired by Leucadia, its largest shareholder, in a roughly $2.5 billion deal expected to close in the first quarter. The transaction will give Jefferies a big financial backer with a thick wallet amid uncertain markets.

Mr. Handler, who will ascend to the CEO position at Leucadia next year, said the pending deal will further distinguish Jefferies from its bank-holding company competitors, though he declined to discuss details about the conglomerate's future reporting structure.

Leucadia, often dubbed "Baby Berkshire" for an investment philosophy similar to Warren Buffett's Berkshire Hathaway Inc. (BRKA, BRKB), boasts holdings that range from beef processing to timber, according to recent securities filings.

Jefferies has been one of the most aggressive firms in recruiting professionals from bigger banks to grow its business lines since 2008, though it slowed such efforts last year. The company's headcount of 3,804 at Nov. 30, is down 10 employees from the prior period and 2.4% lower than a year ago.

On the compensation front, the firm paid out 59.9% of its net revenue in compensation and benefits in the fourth quarter, up from 55.6% a year earlier. For its fiscal 2012 year, the company set aside $1.8 billion for such payouts, up 19% from a year ago. Last week, Jefferies reportedly told employees it would pay year-end bonuses immediately in cash instead of deferred stock like many of its Wall Street rivals.

Write to Brett Philbin at [e-mail]

--Tess Stynes contributed to this report.

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(END) Dow Jones Newswires

December 18, 2012 12:09 ET (17:09 GMT)