Jefferies has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 8.6% to $62.49 per share while the index has gained 8.8%.
Is there a buying opportunity in Jefferies, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Jefferies Not Exciting?
We're cautious about Jefferies. Here are three reasons why JEF doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.
Over the last five years, Jefferies grew its revenue at a sluggish 4.1% compounded annual growth rate. This was below our standard for the financials sector.
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Jefferies’s weak 3.7% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.
3. High Debt Levels Increase Risk
Jefferies reported $13.18 billion of cash and $33.13 billion of debt on its balance sheet in the most recent quarter.
As investors in high-quality companies, we primarily focus on whether a company’s profits can support its debt.
With $1.06 billion of EBITDA over the last 12 months, we view Jefferies’s 18.8× net-debt-to-EBITDA ratio as inadequate. The company’s lacking profits relative to its borrowings give it little breathing room, raising red flags.
Final Judgment
Jefferies isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 15.6× forward P/E (or $62.49 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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