JEF - Jefferies Group

[Parsad]

The stock price sucks in part because they really suck at Investor Relations and as shareholder stewards. Jamie Dimon can make time to do Quarterly calls and be the ambassador of a great bank... but not Handler. Jamie's even called out the Health Care Banker at JEF on the January call as doing a hell of a job. How is this good for JEF?

Handler chalks it up to not wanting to give guidance, etc but that is BS in my opinion. Guidance and visibility are two different things

Ever since the MF Global and subsequent shorting campaign that drove them into merging with LUK, they have acted like a black box with no quarterly calls and one investor day per year. Value is not always its own catalyst and even  LT shareholders suffer the opportunity costs of sitting in dead money and having to chose to either sell below liquidation value or just keep grinding it out. The one saving grace is that they raised the dividend some and now there is some yield at the current depressed price

I believe that the attitude on "the street" is something like: "What professional manager in his/her right mind wants to buy a black box/value trap that's going to kill their performance numbers for god knows how long?"

 

If it weren't for Handler's compensation news, the only time they would get any press for themselves ( excluding analysts appearances) is when Tilman Fertitta and Handler announce something in their Bromance.

They got one analyst to cover JEF a while back....But then he changed jobs...so that ended. Really? You're an investment bank and can't get any coverage of your own bank?

 

Kind of hard to believe that it isn't tough on morale to be an investment bank and have your own stock trading at 70% of TBV. They do their own NAV every year that shows substantial upside, but obviously no one is buying in to it, even after they have executed well on monetizing some assets in the merchant bank recently

 

It's worth $27 per share at TBV. Typically that would be a great buy for a bank without huge problems.

It's one of my longs and has been a big disappointment for all of the above

 

I agree with you, but the lack of visibility is a Leucadia trait, not Jefferies.  Handler used to do quarterly calls before they were acquired.  I suspect Joe Steinberg as Chair was dictating some of the public relations/visibility.  In the last two years, I think they've loosened up and are now realizing that Handler can't do his job with his hands tied.  The Investor Presentation day last year was a good start in helping the market understand the business and its valuation.  Hasn't taken yet, but as intrinsic value widens from market price, they eventually will notice.  Cheers!

[Scunny Bunny]

Thanks Petec, Mungerish & Parsad. Three different but informative perspectives. Just hope they are appropriately positioned given where we are in the market cycle.

[Mungerish]

The stock price sucks in part because they really suck at Investor Relations and as shareholder stewards. Jamie Dimon can make time to do Quarterly calls and be the ambassador of a great bank... but not Handler. Jamie's even called out the Health Care Banker at JEF on the January call as doing a hell of a job. How is this good for JEF?

Handler chalks it up to not wanting to give guidance, etc but that is BS in my opinion. Guidance and visibility are two different things

Ever since the MF Global and subsequent shorting campaign that drove them into merging with LUK, they have acted like a black box with no quarterly calls and one investor day per year. Value is not always its own catalyst and even  LT shareholders suffer the opportunity costs of sitting in dead money and having to chose to either sell below liquidation value or just keep grinding it out. The one saving grace is that they raised the dividend some and now there is some yield at the current depressed price

I believe that the attitude on "the street" is something like: "What professional manager in his/her right mind wants to buy a black box/value trap that's going to kill their performance numbers for god knows how long?"

 

If it weren't for Handler's compensation news, the only time they would get any press for themselves ( excluding analysts appearances) is when Tilman Fertitta and Handler announce something in their Bromance.

They got one analyst to cover JEF a while back....But then he changed jobs...so that ended. Really? You're an investment bank and can't get any coverage of your own bank?

 

Kind of hard to believe that it isn't tough on morale to be an investment bank and have your own stock trading at 70% of TBV. They do their own NAV every year that shows substantial upside, but obviously no one is buying in to it, even after they have executed well on monetizing some assets in the merchant bank recently

 

It's worth $27 per share at TBV. Typically that would be a great buy for a bank without huge problems.

It's one of my longs and has been a big disappointment for all of the above

 

I agree with you, but the lack of visibility is a Leucadia trait, not Jefferies.  Handler used to do quarterly calls before they were acquired.  I suspect Joe Steinberg as Chair was dictating some of the public relations/visibility.  In the last two years, I think they've loosened up and are now realizing that Handler can't do his job with his hands tied.  The Investor Presentation day last year was a good start in helping the market understand the business and its valuation.  Hasn't taken yet, but as intrinsic value widens from market price, they eventually will notice.  Cheers!

 

There in lies the problem. Handler and Freedman do not have the cred that Ian and Joe had and they can't pull it off. FWIW, I think they all would like to just continue in low profile mode, but its been chronically undervalued for a long time. Joe actually shut down the meeting in March because the audience was really pissed and asking tough questions. Rich and Brian spent the first 20 minutes or so talking about the stock price and not much changes.

[Mungerish]

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.

[Spekulatius]

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 that’s even possible.

[petec]

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 that’s 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]

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]

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]

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 that’s 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 don’t 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.

[thepupil]

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 that’s 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 don’t 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]

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,  there’s  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.  There’s no reason to think that our M&A revenue is any different than anyone else’s M&A revenue. There’s 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, we’re 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 that’s 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]

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

[Foreign Tuffett]

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,  there’s  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.  There’s no reason to think that our M&A revenue is any different than anyone else’s M&A revenue. There’s 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, we’re 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 that’s 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]

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.

[ratiman]

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]

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 – 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 – 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 — well, we don’t tend to — we think it is nonsense.

But we do think it’s also nonsense to get into situations, or to try and evaluate situations, where we don’t have any conviction to speak of as to what the future is going to look like. And we don’t think you can compensate for that by having a higher discount rate and saying it’s riskier, so then I don’t really know what’s going to happen and I’ll 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]

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 you’re going to hear from Ben and

the rest of the team today about the progress that we’ve made. It’s less risky business. It’s

more recurring in nature. Um, so some quarters it’s been between 75% and 80%. It’s 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. It’s a

wonderful, you know, wonderful business. Justin’s going to talk in detail about it, the progress

that, uh, the team has made there. Uh, we’re 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.

[Parsad]

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!

[petec]

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]

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]

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]

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.

 

 

 

[Scunny Bunny]

Link to story in today's SMH re the JEF raid on CLSA Australia https://www.smh.com.au/business/markets/how-it-went-down-the-raid-that-gutted-a-major-australian-broking-firm-20190620-p51zog.html

[petec]

Link to story in today's SMH re the JEF raid on CLSA Australia https://www.smh.com.au/business/markets/how-it-went-down-the-raid-that-gutted-a-major-australian-broking-firm-20190620-p51zog.html

 

Not so bad if it’s “highly lucrative”!

[Deepdive]

What's happened to their asset management business?  Wasn't LUK, I mean JEF, seeding fund manager just 4-5 years ago?