Author Topic: JEF - Jefferies Group  (Read 604506 times)

Spekulatius

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Re: JEF - Jefferies Group
« Reply #1530 on: June 11, 2019, 06:45:19 PM »
I forgot to add that if you do a chart of the comp set since the merger the results are disgraceful. I don't want to sound like a bear or a short term oriented long....But the merger was announced in 11/2012. At some point in time, there need to come a rational judgment of the results to shareholders who want more than leaving behind an undervalued stock in their estate.

The results from the Jeffrey Investment banking business are subpar. I think last year, they made $410M pre tax with $6.5B stated book value. Why should a business earning 6.3% ore tax on their equity be worth book? This business needs to be restructured and shrunk to size and perhaps liquidated, if thatís even possible.
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petec

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Re: JEF - Jefferies Group
« Reply #1531 on: June 12, 2019, 04:58:28 AM »
I forgot to add that if you do a chart of the comp set since the merger the results are disgraceful. I don't want to sound like a bear or a short term oriented long....But the merger was announced in 11/2012. At some point in time, there need to come a rational judgment of the results to shareholders who want more than leaving behind an undervalued stock in their estate.

The results from the Jeffrey Investment banking business are subpar. I think last year, they made $410M pre tax with $6.5B stated book value. Why should a business earning 6.3% ore tax on their equity be worth book? This business needs to be restructured and shrunk to size and perhaps liquidated, if thatís even possible.

It's not worth book, but it probably is worth tangible book. And while the transfer of Berkadia into Jefferies doesn't change the reality, it may change the optics. Potentially a smart move, that.

Re disclosure, I suspect direction of travel is more important than current location and it's improving materially with the investor days and biannual valuation of the merchant bank portfolio.

Foreign Tuffett

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Re: JEF - Jefferies Group
« Reply #1532 on: June 12, 2019, 05:10:18 AM »
Why are people talking about the IR day presentation like it's some kind of new thing? The company has been doing at least 1 of these sorts of things every year for years.

https://www.businesswire.com/news/home/20130409006744/en/Leucadia-Jefferies-Announce-2013-2014-Calendar-Investor

Mungerish

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Re: JEF - Jefferies Group
« Reply #1533 on: June 12, 2019, 09:08:36 AM »
Why are people talking about the IR day presentation like it's some kind of new thing? The company has been doing at least 1 of these sorts of things every year for years.

https://www.businesswire.com/news/home/20130409006744/en/Leucadia-Jefferies-Announce-2013-2014-Calendar-Investor

The above is very true. However, the first few years after the shorting debacle were so restrictive in terms of who got in to investor day, you practically needed a blood test to be eligible. One of the two meetings is still done in a basement auditorium with no web cast or transcript.

On the valuation: LUK was never a GAAP earnings story. They were turn around guys that were going to get very lumpy results by the nature of what they did. When they merged with JEF, Handler made a point that much of the better deal flow that came to LUK (Think Fortescue Mines) came from Jefferies. Not so much lately: FXCM + Vitesse Energy+ Garcadia and then the asset management start up has been a dud. I'm sure Handler would say the current results are subdued because of all the investments they have made in hiring new bankers, technology, asset management that have been expensed as opposed to being ordinary Capex wherever possible.

I still believe TBV to be a conservative benchmark, but in years past 1.5X TBV would have been a reliable historical benchmark for either LUK or JEF independently based on how they actually traded.  Given the lack of regard for their shareholders and the way the world has changed, I would not be waiting around for anything near that now.

Spekulatius

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Re: JEF - Jefferies Group
« Reply #1534 on: June 13, 2019, 04:02:38 AM »
I forgot to add that if you do a chart of the comp set since the merger the results are disgraceful. I don't want to sound like a bear or a short term oriented long....But the merger was announced in 11/2012. At some point in time, there need to come a rational judgment of the results to shareholders who want more than leaving behind an undervalued stock in their estate.

The results from the Jeffrey Investment banking business are subpar. I think last year, they made $410M pre tax with $6.5B stated book value. Why should a business earning 6.3% ore tax on their equity be worth book? This business needs to be restructured and shrunk to size and perhaps liquidated, if thatís even possible.

It's not worth book, but it probably is worth tangible book. And while the transfer of Berkadia into Jefferies doesn't change the reality, it may change the optics. Potentially a smart move, that.

Re disclosure, I suspect direction of travel is more important than current location and it's improving materially with the investor days and biannual valuation of the merchant bank portfolio.

I donít think JEF Is bank businesses worth tangible book. They made $410M in ore tax income on tangible book $4.5B last year and that was a relatively good year for IB. How is this worth tangible book with an after tax ROE of 7% maybe? Look at OPE, MS and GS - they are all doing way better than that and most of them trade at tangible book or below (GS, OPE).

The IB Bank needs to be restructured and drastically shrunk into a more profitable core (if such a thing even exists for JEF) , but they are doing just the opposite, so I think the bad capital allocation will continue to destroy value.
Life is too short for cheap beer and wine.

thepupil

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Re: JEF - Jefferies Group
« Reply #1535 on: June 13, 2019, 07:06:22 AM »
I forgot to add that if you do a chart of the comp set since the merger the results are disgraceful. I don't want to sound like a bear or a short term oriented long....But the merger was announced in 11/2012. At some point in time, there need to come a rational judgment of the results to shareholders who want more than leaving behind an undervalued stock in their estate.

The results from the Jeffrey Investment banking business are subpar. I think last year, they made $410M pre tax with $6.5B stated book value. Why should a business earning 6.3% ore tax on their equity be worth book? This business needs to be restructured and shrunk to size and perhaps liquidated, if thatís even possible.

It's not worth book, but it probably is worth tangible book. And while the transfer of Berkadia into Jefferies doesn't change the reality, it may change the optics. Potentially a smart move, that.

Re disclosure, I suspect direction of travel is more important than current location and it's improving materially with the investor days and biannual valuation of the merchant bank portfolio.

I donít think JEF Is bank businesses worth tangible book. They made $410M in ore tax income on tangible book $4.5B last year and that was a relatively good year for IB. How is this worth tangible book with an after tax ROE of 7% maybe? Look at OPE, MS and GS - they are all doing way better than that and most of them trade at tangible book or below (GS, OPE).

The IB Bank needs to be restructured and drastically shrunk into a more profitable core (if such a thing even exists for JEF) , but they are doing just the opposite, so I think the bad capital allocation will continue to destroy value.

Spek, I'm sympathetic to your general sentiment, but for me it is all a matter of price.

Let us say Jefferies investment bank sucks and will make an 8% ROE (on tangible) for the next 20 years with a 0% payout ratio.
Our cost of equity is 10%. We assume it is sold for tangible book in 20 years.

What's it worth in a residual income model?  0.66x tangible book. If you assume that 50% of JEF earnings will go to other/better investments via a payout ratio it's worth 0.75x

Where does all of JEF trade? 0.66x book

The bar being set by the market is adequately low, in my view. JEF is 60% investment bank (by book and less by value) and 40% other.

It's funny to me because JEF has at various points been one of my best/worst investments, but the crappiness of the performance and volatility has led to overall significant $ gains in the stocks and bonds (haven't done a rigorous analysis of the opportunity cost, admittedly. Sure, it'd be nice if they beat expectations and grew book value since 2013 at a better rate than 4%, but if they did that the sstock wouldn't be so cheap.

Buy at 0.66x when it's safe and priced to have a terrible outcome. Sell at 1-1.2x when it is priced for hope of being a "compounder". Lather repeat. There's enough going on with repurchases and asset sales and making money that the idea that the stock just chills at 0.6x for a long time is, in my view remote.

I'm going from small position to big right now.


ratiman

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Re: JEF - Jefferies Group
« Reply #1536 on: June 13, 2019, 10:02:29 AM »
If you look at the proxy management is compensated on meeting targets for ROTDE, return on tangible deployed equity. Last year management earned $1B, 15% ROTDE. There are a number of problems with this. First, the hurdle is too low. Management is compensated for meeting at least a 6% return, which is below cost of capital. Second, the merchant bank and i-bank returns are mixed together. To meet the targets, management simply sells an investment and the profit goes toward ROTDE. Because there is a cap on the incentive rewards, management is rewarded for stretching out the monetization of the portfolio and making sure that not too much profit is realized in a given year, which is why it sold only a fraction of the beef business. The incentive structure has been shifted a little in the direction of shareholder return, but it's nuts that management isn't directly compensated based on the bank but almost entirely on when they sell the merchant assets. In other words, management is basically compensated as if they were a merchant bank and the investment bank is almost a total afterthought.

There's something else that's strange. They have a $245M investment in WeWork. I'm pretty sure anybody with a checkbook has had the opportunity to invest in WeWork. Wasn't the whole rationale for the merchant bank that JEF would have access to premium deal flow?

But the biggest problem is that I don't understand why management is still in the high-capital parts of the investment business. This comment from the October presentation is a head scratcher:

Lastly,  thereís  been  over  the  last  number  of  years  the  advent  of  focused,  you  know,  M&A  boutiques.  And if you looked at our investment bank you could look at it as a business that is running in the $1.8 billion to $2.0 billion per year today of investment banking revenue.  If you want to narrow it down further,  and all of this is in our public filings, the last 12 months through August 31, uh, we reported $828 million of M&A revenue.  Thereís no reason to think that our M&A revenue is any different than anyone elseís M&A revenue. Thereís no reason to think our margins are meaningfully different than anyone else on our M&A business, and effectively you have,  you  know,  somewhat  pure  to  pure  M&A  shops  trading  at  better  than  four  times  that  revenue  number,  um,  and  you  have  businesses  that  are  more  blended  businesses  trading  at  better than two times that revenue number.  Again, weíre not suggesting a conclusion, but we are suggesting that the value  of  Jefferies,  in  our  view,  you  know,  is  in  excess  of  its  book  value  thereby putting us, you know, into the table thatís in the middle of this page. 


So why doesn't JEF just shut down the bond business and focus on equities and M&A?

ukvalueinvestment

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Re: JEF - Jefferies Group
« Reply #1537 on: June 13, 2019, 10:07:23 AM »
It's not that easy to just close a Bond (Fixed Income) business but, point taken.

This has been a very thoughtful conversation.

I own Jefferies.  My own take is that it's cheap but banking is a crappy business and there's probably better places to put my money over the next decade.  I'm going to own it for a quarter or two more, see if things improve, or things get sold and the stock re rates.  I'm not going to trust Handler and Friedman as long term stewards of my capital
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Foreign Tuffett

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Re: JEF - Jefferies Group
« Reply #1538 on: June 13, 2019, 11:40:14 AM »
If you look at the proxy management is compensated on meeting targets for ROTDE, return on tangible deployed equity. Last year management earned $1B, 15% ROTDE. There are a number of problems with this. First, the hurdle is too low. Management is compensated for meeting at least a 6% return, which is below cost of capital. Second, the merchant bank and i-bank returns are mixed together. To meet the targets, management simply sells an investment and the profit goes toward ROTDE. Because there is a cap on the incentive rewards, management is rewarded for stretching out the monetization of the portfolio and making sure that not too much profit is realized in a given year, which is why it sold only a fraction of the beef business. The incentive structure has been shifted a little in the direction of shareholder return, but it's nuts that management isn't directly compensated based on the bank but almost entirely on when they sell the merchant assets. In other words, management is basically compensated as if they were a merchant bank and the investment bank is almost a total afterthought.

There's something else that's strange. They have a $245M investment in WeWork. I'm pretty sure anybody with a checkbook has had the opportunity to invest in WeWork. Wasn't the whole rationale for the merchant bank that JEF would have access to premium deal flow?

But the biggest problem is that I don't understand why management is still in the high-capital parts of the investment business. This comment from the October presentation is a head scratcher:

Lastly,  thereís  been  over  the  last  number  of  years  the  advent  of  focused,  you  know,  M&A  boutiques.  And if you looked at our investment bank you could look at it as a business that is running in the $1.8 billion to $2.0 billion per year today of investment banking revenue.  If you want to narrow it down further,  and all of this is in our public filings, the last 12 months through August 31, uh, we reported $828 million of M&A revenue.  Thereís no reason to think that our M&A revenue is any different than anyone elseís M&A revenue. Thereís no reason to think our margins are meaningfully different than anyone else on our M&A business, and effectively you have,  you  know,  somewhat  pure  to  pure  M&A  shops  trading  at  better  than  four  times  that  revenue  number,  um,  and  you  have  businesses  that  are  more  blended  businesses  trading  at  better than two times that revenue number.  Again, weíre not suggesting a conclusion, but we are suggesting that the value  of  Jefferies,  in  our  view,  you  know,  is  in  excess  of  its  book  value  thereby putting us, you know, into the table thatís in the middle of this page. 


So why doesn't JEF just shut down the bond business and focus on equities and M&A?

They bought their stake for $9 million in 2013 + have already cash out for at least $12.7 million. This is actually an example of something that has gone very right.

More broadly, I agree with Spekulatius that Jefferies Group is a bad business that struggles to consistently earn an acceptable return.

The other issue is that the corporate parent's expenses are excessive (page 24 of last 10-K).



coc

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Re: JEF - Jefferies Group
« Reply #1539 on: June 13, 2019, 01:17:08 PM »
I would consider investment banking (with trading/merchant banking attached) to be an all-time bad business. In some ways worse than airlines. Almost all of them have gone bankrupt over time. The ones left standing almost went bankrupt. Buffett once held up a plaque from an underwriting in the 30s (?) and every name on the list was gone.

Basically, you get a business that splits half of its revenue (in the case of JEF, more) with its employees. They have no opportunity to improve this because if they try to cut it, those employees will hold it hostage and/or leave to go elsewhere.

It has very little fixed costs, so it doesn't make more money as it gets larger.

To run it fairly and without taking too much risk, you are praying and hoping for about a 10%-12% return on equity after the revenue-split. The only time this is generally exceeded is when the bank is way too levered or taking too much risk.

Your morals are constantly in question as you push unneeded trading products (read FIASCO if you need a good purge), biased research, and unneeded M&A on corporations and the public.

And finally, once you've wade through the mess, you accept a tail risk that is very fat, which if it were hedged properly, would probably reduce returns to an even less acceptable level, and no bank does it anyway.

Why anyone would choose to invest in this stuff...it kind of boggles the mind. If I could design the opposite of See's Candy I think I might come up with a mid market investment bank.
« Last Edit: June 13, 2019, 01:22:04 PM by coc »