Author Topic: JEF - Jefferies Group  (Read 571031 times)

ratiman

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Re: JEF - Jefferies Group
« Reply #1540 on: June 14, 2019, 01:24:07 AM »
M&A advisory is actually a very good business, and the CFO said it should be valued at 4x revenues, or more than $3billion. Maybe JEF needs the capital heavy DCM  business, otherwise it would be regulated like an investment company? Broker dealers are exempt from the investment company rules. That would explain why management isn't compensated on the results of the investment bank.   


Mungerish

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Re: JEF - Jefferies Group
« Reply #1541 on: June 14, 2019, 09:31:21 AM »
I have alos enjoyed the conversation here on JEF and do not want the following to sound argumentative. I'm not happy with Handler et al.
I do however have a different view on using the Capital Asset Pricing Model and applying a cost of capital of 10%

Here's what Buffett said about JPM in the current interest rate climate recently on CNBC (2/20/19):
BECKY QUICK: JP Morgan is a relatively new stake. You had 35 million in the third quarter and that was a new stake. You raised it to 50 million Ė or 50.1 million shares, I should say, in the fourth quarter. Is that your purchase?
WARREN BUFFETT: Yeah.
BECKY QUICK: Because for a long time, you held it in your own portfolio. Why now?
WARREN BUFFETT: I've still got a little bit. But that goes back years and years and years, yeah.
BECKY QUICK: So why JP Morgan now?
WARREN BUFFETT: Well, the better question is, why we were so dumb about not buying it earlier? And the answer, I was dumb not buying it earlier. But it's a very well-managed bank. And banks are Ė you can find a bank like JP Morgan THAT EARNS, maybe 15%, maybe 17%, even, on net tangible equity. A business that earns 15% or 16% or 17% on net tangible equity, that's incredible in a world of 3% bonds. I mean, just imagine that you had a deposit account with JP Morgan that they made a mistake and they gave you 15% on it. And they couldn't redeem it. What would you sell that account for? You wouldn't sell it for 100 cents on the dollar. You wouldn't sell it for 200 cents on the dollar. You wouldn't even sell it for 300 cents on the dollar. You have an FDIC-guaranteed instrument that would now be at 300 cents on the dollar. If it was 15% on equity, you'd be earning 5% on it, which is way better than treasuries. Now, if on top of that, your deposit allows you to let your interest compound to some extent, now, that instrument becomes even worth way more. Because if you have an instrument that could compound at 15% for ten years and use the added capital, that's worth way more than three times tangible equity at current interest rates, way more

Now CLEARLY, JEF is not JPM.....Lets just say it's earning 6-7% on TBV.
Does that make a dollar worth $.70 because your not earning 15%?
I would say a volatile bond earning 6-7% in a 2.1% 10 year world is not worth less than par. It's not going out of business soon. It may have managerial issues that are sub optimal, but it's not worth less than TBV

Here's a few references from Buffett/ Munger on CAPM that I have always enjoyed when I read or heard them at the meetings:


We think all the capital asset pricing model-type reasoning with different rates of risk adjusted return and all that, we tend to think it is ó well, we donít tend to ó we think it is nonsense.
But we do think itís also nonsense to get into situations, or to try and evaluate situations, where we donít have any conviction to speak of as to what the future is going to look like. And we donít think you can compensate for that by having a higher discount rate and saying itís riskier, so then I donít really know whatís going to happen and Iíll have a higher discount rate. That just is not our way of approaching things.
https://buffett.cnbc.com/video/2001/04/28/afternoon-session---2001-berkshire-hathaway-annual-meeting.html?&start=5268.81
https://buffett.cnbc.com/video/2001/04/28/afternoon-session---2001-berkshire-hathaway-annual-meeting.html?&start=5721.64

 

thepupil

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Re: JEF - Jefferies Group
« Reply #1542 on: June 14, 2019, 10:44:33 AM »
Mungerish, I own the stock (in size as of a few days ago) and agree with you. I was just trying to illustrate that JEF is priced to generate returns that are lower than some reasonable equity rate of return and in that I see upside. In the diversity of businesses and sources of value, I see safety. From here, I like JEF a lot.

It may be repetitive, but I'd also point out that going forward, that $4.5 billion tangible in Jefferies includes one of JEF's best businesses: Berkadia. I think to paint all of their investment banking business as crappy or low returning (on a go forward basis) may be a mistake.

I would have preferred they not do this as it will obscure this gem (the flip side is it could cause a re-consideration of quality of the entire investment bank, perhaps undeservedly).

But don't be surprised when Jefferies prints a far higher than historical return on tangible ROE in the future than in the past. Berkadia is $245 million of equity that in the past few years has cranked out $94mm, $93mm, and $80mm in earnings. those are cyclical, of course (re-fi volume).

Whether it's at the parent or within Jefferies really doesn't matter for JEF's intrinsic value. Just saying that it's one of the many tools (along with share buybacks, monetizations, etc. that JEF has to increase valuations) even if you assume the crappy parts of Jefferies continue to be crappy. If 5% of Jefferies $4.5 billion of book is worht 3x book, what is implied by the market for the remainder? $4500*0.66=$2.97 billion implied value of Jefferies. Spitball Berkadia valuation ($750 million). Implied value of remainder: $2.222 billion. What do you get for $2.2 billion? $4.2 billion of crappy Jefferies. That's 52 percent of tangible book. But wait that includes Leucadia asset management? It's been a dud, but is it worth 1/2 book?
But wait that includes their advisory business that the market values very differently elsewhere.

You all get my point.

I think JEF is at a similar valuation extreme as when I wrote this in 2016.

Most of those things worked out positively. National Beef, Garcadia monetizations. Jefferies hasn't blown up yet. HRG/SPB was simplified (but the business has had issues). Linkem continues to grow. the DTA continues to be monetized. And the stocks only like 7% higher.


I assume the ~$460M in energy investments (Juneau, Vitesse ) are probably zeros. National beef seems permanently impaired and Jefferies profitability has been subpar for years.


I know we had this discussion before, but why is owning this stock better than GS? GS tangible book is about $162/share, so you can buy this stock for tangible book. Wee know that GS marks tend to be conservative and they own a huge wealth management business that is certainly worth more than tangible book. Buying GS right now is buying a dollar for 80c or better - and they do have a reasonable overall return  on equity (~10%) which LUK does not, due to so much dead weight.

I would so argue that being a TBTF bank has it perks, as your customers won't be running from you if there is a hiccup in the financial markets. I am not so sure about how Jefferies will be viewed in such a case.

LUK trades at 73% of tangible capital. JEF's IB is 44% of that. I don't think the two are really comparable. 

If we write off National Beef, Vitesse, Juneau, Golden Queen, Linkem, 1/2 of the DTA, 50% of FXCM, and mark JEF at 85% of tangible, you get to the stock price.

I think at this point (and I recognize I've said this at higher prices) the issues are priced in and the optionality is very high. Taking the above steps to impair the assets is probably overly harsh, but leaves you at a good starting point in terms of owning the other stuff.

- Berkadia, maybe worth 8-16% of the market cap as a good, albeit cyclical, business that is easily monetizable given the other side of the JV is Berkshire. It's not worth $200MM.

-Garcadia and being a landlord to garcadia seems like a decent business worth more than its mark

- Harbinger pro-forma for the closing of the FG&L sale in Q2 (which has some China risk) will be a no net debt owner of Spectrum Brands so that's 10% of the market cap that's in a relatively easy to understand/ get comfy with business (making George foreman grills and other crap).

-Homefed is marked well below its market value and is monetizable

Leucadia is my biggest $ PnL loser of all time due to combination of a 30+% drawdown and big sizing (think it was maybe 15% or so at peak). It was a mistake at $24 and a bigger mistake not selling in the low $30's when I thought it was getting a bit ahead of itself but was trying to be all "let the winners run".

That being said, I see a ton of levers to pull to convert non-earning assets into more obvious forms of value.

Side note: I thing buying HRG and shorting out the FG&L deal risk and SPB MTM may be a nice way to play a Harbinger simplification/restructuring. Steinberg is highly incentivized to close the NAV discount for LUK's sake. Haven't run the exact numbers though, just spitballing.


One of the most important things to do, uh, to reduce the risk at Jefferies, we believe, is to
have investment banking be our major growth engine, and youíre going to hear from Ben and
the rest of the team today about the progress that weíve made. Itís less risky business. Itís
more recurring in nature. Um, so some quarters itís been between 75% and 80%. Itís more
valuable revenues from an operating perspective. It builds the brand and franchise value, and
Brian will talk about how it should translate to shareholder value once our transition is actually
understood and appreciated by the marketplace.

The second thing that we did at the LLC level to take the volatility out is bring Berkadia into the
business. This further diversifies Jefferies. It brings more scale to our business. Itís a
wonderful, you know, wonderful business. Justinís going to talk in detail about it, the progress
that, uh, the team has made there. Uh, weíre staying true at the Jefferies LLC level to be a pure
financial services play, and by combining this and the asset management business, uh, it will
show you the recurring revenue businesses that we intend to keep for the long-term.
« Last Edit: June 14, 2019, 10:56:47 AM by thepupil »

Parsad

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Re: JEF - Jefferies Group
« Reply #1543 on: June 14, 2019, 03:05:50 PM »
Absolutely agree thepupil!  I think alot of the issues around Jefferies have been fixed, and Handler is now being given more free reign on the company.  I've been a Leucadia holder in the past and it was a very different beast than Jefferies...the management style was completely different.  I think everyone has come to realize that Handler has to make the company his own, and that's what we've seen happen over the last couple of years.  We own alot of Jefferies and think it should be trading at a premium to tangible book.  I think the earning power of the business will become more obvious, and we're already seeing that in the last 18-24 months.  Cheers!
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petec

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Re: JEF - Jefferies Group
« Reply #1544 on: June 14, 2019, 11:47:25 PM »
Also agree.

I actually think putting Berkadia into Jefferies might be quite smart. I don't think Berkadia is fully valued by the market (Handler has said he wouldn't sell it for $1bn) but if it can help Jefferies justify 1x BV it creates a lot of value.

Handler also seems to feel LAM is at an inflection point. We will see.

The fact that the DTA is being used up, when 2-3 years back there was real doubt whether this would ever happen, is very significant.

Incidentally, Marfrig (the buyer of National Beef) is in merger talks. Their lawyers say this doesn't trigger JEF's sell option but you never know. Personally I very much doubt the incentives drove the structure of the National Beef deal. If it had, it would have made more sense to split it into equal parts over 2-3 years, not wait for 5. I suspect they wanted 5 years of strong cash flows from NB to help use up the DTA.

skanjete

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Re: JEF - Jefferies Group
« Reply #1545 on: June 15, 2019, 08:55:48 AM »
Jefferies is indeed way undervalued, but there is good reason for it.

In the annual report 2014 Handler wrote :
"We believe the foundation is now set for us to optimize the
capabilities of our existing businesses, continue to deploy our cash judiciously and grow our book value
per share, which we believe is the yardstick by which we should be measured."

He was right, then Leucadia/Jefferies indeed had to be valued based on the assets and book value.
But they clearly failed to generate some decent return on their assets over the last 6 years. Only recently they managed to post some growth in book value per share.

As a holding company, I still think the company should be valued based on the assets, but they fail to tell a clear story. Over the recent years, they emphasized mainly the financial  services businesses which generated some income, but did little to move the needle on the book value per share. In fact, they hardly mention the book value per share in their latest letters or presentations. Their income statement is mainly a reflexion of their financial services assets but these are only part of the story.


The actual main driver of book value is their mercahnt bank assets. These were mainly investments from former Leucadia. After the past 6 years, it is clear that their capital allocation is sub par. Just look at the investments they made in the last 6 years. Their record is quite terrible. So they don't succeed in growing the value of their mercant banking assets, wich comprise about half the value of the company. Too pity Cummings isn't around anymore.

But all this being said, it is clear that the current value is way higher than the market value. An investor who is interested in the financial services, doesn't want to pay for the other assets, and an investor who is interested in a Leucadia type of operation is disappointed because capital allocation is that bad.

So I think the best way forward for them would be to montize all the merchant bank assets, return the capital to the shareholders by buying back their stock and focus again on what they're good at : financial services. This way, they would have a clear story again, they finally would succeed in lifting their book value per share and the market certainly would reward them for it.

ValueMaven

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Re: JEF - Jefferies Group
« Reply #1546 on: June 16, 2019, 07:59:25 AM »
Why buy this over GS which is also dirt cheap, and best in class in basically everything ex: PWM ??  Super SOTP valuation is there -- I just dont see how its realize.  Maybe if the market falls a lot; but who knows

thepupil

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Re: JEF - Jefferies Group
« Reply #1547 on: Today at 11:18:35 AM »
also, because I think JEF has never been healthier, i just bought the 6 5/8 of 2043 (after selling them at par-ish a few years back) for $106.54 / 6.10% yield, 388 bps above the interpolated treasury (building up a long duration bond portfolio to hold against my mortgage)

it's a nice liquidity premium for what is a healthy investment grade issuer and not just an investment bank.