JEF - Jefferies Group

[Spekulatius]

I gave up on current management

 

I'd be interested to know why. So far, as far as I can tell, they have, in no particular order:

- simplified the portfolio, selling speculative junk as well as Conwed and Knight and putting Chrome into runoff

- concentrated on likely cash-flowing winners (Berkadia, Linkem, HomeFed, Garcadia. Maybe Vitesse should be in here but I never trust E&Ps to pay out cash rather than DRILL!)

- returned Jefferies to a reasonable level of profitability

- generated spectacular ebitda at National Beef (ok this wasn't their doing, it was the cycle, but they made the right decision to keep it - I'll declare final victory if they sell it well)

- started converting the NOLs to cash given profits at JEF and NB

- restructured HRG/Spectrum to optimise portfolio/sell assets/reduce debt/use NOLs - LUK's stake will potentially be spun to shareholders in 2018

- started LAM and got it to breakeven - clearly something that will be very valuable if it works and fairly low downside if it doesn't

- done one major deal on which they've already profited despite operational problems, and they have most of its cash flows in perpetuity yet to come - great deal structure for us (FXCM)

- positioned LUK to be able to move fast when they see opportunity

 

That's an absolute transformation in 5 years, and while it may not yet have shown up in the financials I think a lot of things are starting to align. Generating cash and converting the NOLs generates huge optionality for the next deal.

 

I sold shortly after LUk became an de facto investment bank with some company odds and ends. Why own a second grade investment bank when you could own the real thing (GS ) cheaper at that point? I did buy GS from the proceeds and since sold one too. I didn’t look back. I don’t think Jeffries is really worth book, they don’t generate profits close to their cost of capital, which I think would be at least 8% post tax. Heaven forbid what it’s worth if we have a market crash or recession.

[LowIQinvestor]

I gave up on current management

 

I'd be interested to know why. So far, as far as I can tell, they have, in no particular order:

- simplified the portfolio, selling speculative junk as well as Conwed and Knight and putting Chrome into runoff

- concentrated on likely cash-flowing winners (Berkadia, Linkem, HomeFed, Garcadia. Maybe Vitesse should be in here but I never trust E&Ps to pay out cash rather than DRILL!)

- returned Jefferies to a reasonable level of profitability

- generated spectacular ebitda at National Beef (ok this wasn't their doing, it was the cycle, but they made the right decision to keep it - I'll declare final victory if they sell it well)

- started converting the NOLs to cash given profits at JEF and NB

- restructured HRG/Spectrum to optimise portfolio/sell assets/reduce debt/use NOLs - LUK's stake will potentially be spun to shareholders in 2018

- started LAM and got it to breakeven - clearly something that will be very valuable if it works and fairly low downside if it doesn't

- done one major deal on which they've already profited despite operational problems, and they have most of its cash flows in perpetuity yet to come - great deal structure for us (FXCM)

- positioned LUK to be able to move fast when they see opportunity

 

That's an absolute transformation in 5 years, and while it may not yet have shown up in the financials I think a lot of things are starting to align. Generating cash and converting the NOLs generates huge optionality for the next deal.

 

I think National Beef will be sold soon and add materially to BV.

 

[mcliu]

LUk is a tricky beast. I read their letters. They use honey words. But their record is atrocious and has resulted in the burning of one's capital.

Book ten years ago was $11.22, the book value today is $28.37. Revenue was $1bn in 2008. Operating income alone in 2017 was $1bn. If that is atrocious, then please don't ever let me have you evaluating my performance.

 

The favorable ten year performance you describe is not attributable to current management.  Jefferies merged into Leucadia in March 2013 and Jeffries management took the helm.  At year end 2012, the last year Joe Steinberg & Ian Cummings ran Leucadia, book value was $27.67 and net income was $854 million. 

 

I gave up on current management and sold during the January surge in the stock price.  I probably waited too long to sell.

 

The income at that time was mostly from one-time gains from selling Fortescue and markups in Jefferies shares though.. Whereas today, the ~$1 billion pre-tax income can almost be described as recurring (but quite cyclical).

[greenwave]

LUk is a tricky beast. I read their letters. They use honey words. But their record is atrocious and has resulted in the burning of one's capital.

Book ten years ago was $11.22, the book value today is $28.37. Revenue was $1bn in 2008. Operating income alone in 2017 was $1bn. If that is atrocious, then please don't ever let me have you evaluating my performance.

 

The favorable ten year performance you describe is not attributable to current management.  Jefferies merged into Leucadia in March 2013 and Jeffries management took the helm.  At year end 2012, the last year Joe Steinberg & Ian Cummings ran Leucadia, book value was $27.67 and net income was $854 million. 

 

I gave up on current management and sold during the January surge in the stock price.  I probably waited too long to sell.

 

The income at that time was mostly from one-time gains from selling Fortescue and markups in Jefferies shares though.. Whereas today, the ~$1 billion pre-tax income can almost be described as recurring (but quite cyclical).

 

---

mcliu,

 

As a long term holder of LUK for over 10 years ,I concur with you  that LUK should  soon become a sustainable cash flow generator.

 

Also, as I see it - the more market volatility we have in the future ,the better their income generating should be ?

 

greenwave

 

 

[mcliu]

Not sure if it'll improve operating earnings, but traditionally they've done a good job making good investments when there are market dislocations. It's led to several good one-time gains in the past few years. Hopefully in the next downturn they can acquire some assets with long growth runways..

[LowIQinvestor]

Jefferies Reports Fiscal First Quarter 2018 Financial Results

https://www.businesswire.com/news/home/20180320005357/en/Jefferies-Reports-Fiscal-Quarter-2018-Financial-Results#.WrEUI4Nil2A.twitter

 

"Our first quarter results reflect continued strong performances in Investment Banking, with net revenues of $434 million, and solid performance in both Equities and Fixed Income, with total revenues of $369 million. Our Investment Banking results reflect a good new-issue equity and debt environment, and another strong quarter in mergers and acquisitions. Fixed Income revenues were a strong $213 million and relatively consistent across the quarter. Our Equities revenues were $156 million. Activity in December and January was strong. Volumes during the first half of February were more muted in a period of increased volatility following a sell-off in the global equity markets. Equity secondary activities have subsequently returned to levels experienced in the first two months of our fiscal year. Our pre-tax income for the first quarter was $123 million and, ignoring the provisional tax charge, we would have reported adjusted net earnings of $103 million(1).""

[arcticfox]

Full disclosure, I am a LUK owner and have followed the company for a long time. I understand the past, the struggles, the management changes etc, but at present when you review the collection of businesses and their 2017 results I am struggling to understand why the stock trades where it does. It trades for basically tangible book value. In 2017 they had a double digit pre-tax ROE. Can somebody help be understand the bear case going forward. The stock continues to imply low to no growth in BV going forward. Frankly I would think a sale or spin of national Beef would jump start things.

[Foreign Tuffett]

Full disclosure, I am a LUK owner and have followed the company for a long time. I understand the past, the struggles, the management changes etc, but at present when you review the collection of businesses and their 2017 results I am struggling to understand why the stock trades where it does. It trades for basically tangible book value. In 2017 they had a double digit pre-tax ROE. Can somebody help be understand the bear case going forward. The stock continues to imply low to no growth in BV going forward. Frankly I would think a sale or spin of national Beef would jump start things.

 

Go back and read some of the things people were saying about Leucadia two or three years ago (the 2017 annual letter hints at this). It wasn't that long ago that its largest businesses weren't generating significant cash flow. The general idea is that Jefferies and National Beef are currently over performing, but that their results will come back to earth. 

 

[arcticfox]

I am well aware of the below average years of their largest businesses along with the poor timing of the energy investments the last few years and that is why Book value has barely grown, however I struggle to believe that Jefferies and Beef will go back to the previous low levels of earnings absent a significant economic decline. They may be over earning currently but it seems that the cycle has recently turned in their favor and won't be a one or two year thing. But if the bear case is over earning of the biggest businesses than that is what it is. Any other thoughts? Thank you

[petec]

I find it hard to believe Jefferies is overearning. Maybe it can't do much better, but in general it benefits from volatility so I doubt 2017 was an over-earning year. NB, maybe, but the cycle lasts a while. Ultimately it boils down to: will the last 5 years be representative of the future? I see no reason to think that it will.

[scorpioncapital]

"We have invested $83.0 million in Golden Queen. The net book value of our investment was $74.5 million at December 31, 2017."

 

Just wondering why they carry this at net 74.5m for 30% stake since if you look at the public portion share price it's basically zero?

 

[benhacker]

"We have invested $83.0 million in Golden Queen. The net book value of our investment was $74.5 million at December 31, 2017."

 

Just wondering why they carry this at net 74.5m for 30% stake since if you look at the public portion share price it's basically zero?

 

Yeah, I'm curious when they write this down.  the Public 50% has a market value of $45m right now, so clearly their $75m is overstated.  Although, it could be that GQM rallies back, but results have been moderate, and gold/silver pricing have been pretty weak.

 

Good to see you back here on the LUK thread Scorpion...

[WhoIsWarren]

Good spot Scorpion.  I've never looked at LUK's Golden Queen interest in much detail as it's small, but it's a different legal entity from the quoted GQM that you're looking at.

 

From LUK's 10-K:

Golden Queen is a joint venture between Golden Queen Mining Co., Ltd. (“GQM”) and Gauss LLC (“Gauss”). We own 70% of Gauss, which in turn owns 50% of the joint venture, giving us an effective 35% interest in Golden Queen.

 

GQM had $47m of debt at year end 2017, which obviously has a magnified effect on its equity value.  I can't find financial statements for Gauss -- it might not have any debt (or even have net cash). Looking at the press release when the JV was announced (2014), Gauss invested $110m in Golden Queen and committed to invest a further $40m to build out the mine.  LUK's 70% share of that investment would be $105m, so they've partially written down their investment already.

 

Either way, it's a rounding error in terms of group valuation.  But I suppose one could begin to wonder whether there are other assets on LUK's balance sheet that are valued too highly (on balance I don't think so).

 

 

[benhacker]

WiW, note that post Dec 31, GQM just raised $25m in a rights offering to fund the final(?) capex for Soledad Mountain project... so the math / debt is slightly different.

[WhoIsWarren]

Thanks Ben, I hadn't seen that.  You see whether LUK participated in this?

 

[Also, I wrote about them investing $105m.....but I was clearly wrong on that (as Scorpion quoted "We have invested $83.0 million in Golden Queen").]

[benhacker]

"You see whether LUK participated in this?"

 

LUK doesn't own common.  They own a direct stake (senior) above common i the JV.  They will need to fund capex spend in partnership with common, but don't have any ownership of GQM directly, so to participate in the rights, they would have to actively buy common first.

 

The Clay family has stakes in both the common and the JV, and thus they backstopped the rights.

 

I still struggle with how to conceptually value the JV stake LUK owns vs. common ownership.... but either way, I think it's clear the M2M value of the JV stake LUK owns is worth less than cost.

[mcliu]

Has anyone gone to the LUK AGM? Is it worth going? Or is the Investor Day in October better?

[EricSchleien]

Has anyone gone to the LUK AGM? Is it worth going? Or is the Investor Day in October better?

 

Yes, I have been.  I found it useful.

[thepupil]

https://www.reuters.com/article/us-leucadia-natl-restructuring/leucadia-sells-stakes-for-1-33-billion-says-to-streamline-assets-idUSKBN1HG1N3

 

https://www.reuters.com/article/brief-leucadia-national-corp-announces-s/brief-leucadia-national-corp-announces-strategic-transactions-idUSFWN1RM0K0

 

big moves for Jefferies Financial Group

[scorpioncapital]

Basically Jefferies comes full circle and becomes Jefferies again as it was before. Hard to admit the merger with Leucadia was not a disaster. Reminds me of SHLD and SRG. Finally finding out a better direction. Look at IBKR, a good broker can do very well as rates rise.

 

Btw, does this, "CO ANTICIPATES IT WILL HAVE NET TAX BENEFIT FOR Q1 DUE TO REVERSAL OF VALUATION ALLOWANCES RELATED TO DEFERRED TAX ASSETS"

 

mean that they are able to use the deferred asset shield for this capital gains transaction?

[Liberty]

Steinberg and Cummings' succession plan down the drain. I guess this was somewhat predictable as the original Leucadia was so much about its leaders, and Jeffries seemed to also have its own strong personality...

 

Basically, JEF got paid to be taken over, and then it just went back to being itself... (though the stock hasn't exactly done well since, so not quite the ideal deal)

[Spekulatius]

The Deal was a disaster for LUK, not for Jeffries. Jeffries had a near death experience during the European bond crisis and needed additional backup capital, which LUK provided to calm the concerns.

 

I am skeptical on the new JEF, the investment banking business model is broken imho, and being just a second Tier investment bank makes it even I worse.

[petec]

Am I missing something here? They've just sold most of NB for a fat profit, which few would have thought likely 2 years ago, and they've converted Garcadia to cash at (probably) the top of the auto cycle.

 

If they hadn't changed the name we'd all be saying it was a great day. But they changed it so apparently that chucks all the good work of the last 5 years in the bin.

 

Has anyone considered what would have happened if they hadn't done the deal? Lots of junk assets and with the executive team on the way to the door? I have no view on whether it was a good deal but I don't like the alternative much.

 

Kind of annoying, I was looking forward to adding at 1x tbv ;)

 

Edit: looks like p/tbv has actually fallen so I may have to retract my last sentence!

[benhacker]

A bit strange.  No surprise on Nat Beef, but price for Garcadia is disappointing, and name change is annoying to me.

 

Scorpion: "mean that they are able to use the deferred asset shield for this capital gains transaction?"

 

Yes, but I think it's a timing thing... revalue tax assets this Q, use them when the deal closes.

[petec]

A bit strange.  No surprise on Nat Beef, but price for Garcadia is disappointing, and name change is annoying to me.

 

 

Do you mind sharing what you had pencilled in for Garcadia? I had $300m but that was severely discounted due to lack of knowledge.

 

Surely the name change is irrelevant?