Over the last six months, Jefferies’s shares have sunk to $52.00, producing a disappointing 5% loss - a stark contrast to the S&P 500’s 11.6% gain. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Jefferies, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Jefferies Not Exciting?
Despite the more favorable entry price, we're swiping left on Jefferies for now. Here are three reasons we avoid JEF 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. Any business can have short-term success, but a top-tier one grows for years.
Regrettably, Jefferies’s revenue grew at a sluggish 1.8% compounded annual growth rate over the last five years. This fell short of our benchmarks.
2. EPS Trending Down
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.
Sadly for Jefferies, its EPS declined by 7.2% annually over the last five years while its revenue grew by 1.8%. This tells us the company became less profitable on a per-share basis as it expanded.
3. High Debt Levels Increase Risk
Jefferies reported $13.72 billion of cash and $48.5 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 $1.37 billion of EBITDA over the last 12 months, we view Jefferies’s 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 doesn’t pass our bar. After the recent drawdown, the stock trades at 13.9× forward P/E (or $52.00 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are superior stocks to buy right now. Let us point you toward one of our top digital advertising picks.
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