While Warren Buffett's Berkshire Hathaway certainly takes outsize positions in stocks (Apple, for example), the massive conglomerate has a diverse equities portfolio worth north of $310 billion. It includes varied positions in 45 different stocks ranging from traditional to exchange-traded funds (ETFs).
One of Berkshire's smaller positions (less than one-tenth of 1% of the overall portfolio) is the investment bank Jefferies Financial Group(NYSE: JEF). Berkshire owns roughly 433,500 shares. Jefferies recently reported earnings that came up short of analyst estimates.
Should investors (including Berkshire investors) be worried?
Improvements in the core business
Jefferies reported diluted earnings per share of $0.75 for its fiscal third quarter ended Aug. 31. That came in $0.02 short of consensus estimates. Revenue of roughly $1.68 billion also fell short of consensus estimates of approximately $1.7 billion.
Despite the double miss, Jefferies performed well in several core businesses. Total investment banking revenue, which can be tricky to forecast, came in at $949.5 million, roughly $27 million short of consensus, as debt underwriting and other investment banking fees disappointed. However, advisory revenue from mergers and acquisitions (M&As) beat consensus nicely.
High interest rates and volatile market conditions have led to a decline in M&As and initial public offerings (IPOs) in recent years. This quarter represented a real turning point for M&As, with advisory revenue up 109% from the prior quarter and 77% year over year. Equity underwriting revenue remains depressed, while debt underwriting has rebounded year over year.
In Jefferies' earnings statement, management attributed the increase in advisory revenue "to market share gains reflecting the early benefits of the investments we have made in our platform over the past few years, as well as improving market conditions."
Capital markets revenue from equities and fixed-income trading also had a big beat in the quarter, coming in at roughly $671 million and $87 million higher than analyst estimates. The big beat came from equities trading, which makes sense given some of the broader market's volatility in recent months (see chart below). Trading desks do well when investors are moving in and out of stocks and repositioning their portfolios.
The big miss for Jefferies came in asset management, which fell shy of consensus estimates by more than $80 million. However, asset management is a small part of the bank's total revenue, and management attributed the struggles to difficult market conditions.
Should investors be worried?
I am not overly concerned about Jefferies' miss and am pleased to see some nice beats in the bank's core business such as M&A advisory and capital markets. Management said pipelines have remained strong and it is excited about the investments it has made in talent.
Ultimately, investment banking is a cyclical business, and declining interest rates as well as a backlog of deals that have been pushed out should help the entire industry. I would expect advisory revenue to continue to pick up into 2025 and the eventual thawing of the IPO market, which has remained sluggish this year.
Jefferies has also been gaining market share. According to investment banking and capital markets league tables, Jefferies has become a top 10 bank for M&A advisory fees after failing to crack the top 10 in 2023. Additionally, it's moved from the eighth spot in equity underwriting fees in 2023 to the sixth spot this year. The stock has had a great year, up 54%, and it is now trading close to all-time highs, so Buffett has done well on the investment. Improving market conditions should serve as a tailwind to earnings in 2025.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, and Jefferies Financial Group. The Motley Fool has a disclosure policy.
