Jefferies (JEF): Buy, Sell, or Hold Post Q2 Earnings?

Jefferies trades at $66.40 and has moved in lockstep with the market. Its shares have returned 15.2% over the last six months while the S&P 500 has gained 16.4%.

Is now the time to buy Jefferies, or should you be careful about including it in 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?

We're swiping left on Jefferies for now. Here are two reasons why JEF doesn't excite us and a stock we'd rather own.

1. Previous Growth Initiatives Haven’t Impressed

Return on equity (ROE) reveals the profit generated per dollar of shareholder equity, which represents a key source of bank funding. Banks maintaining elevated ROE levels tend to accelerate wealth creation for shareholders via earnings retention, buybacks, and distributions.

Over the last five years, Jefferies has averaged an ROE of 8.5%, uninspiring for a company operating in a sector where the average shakes out around 10%.

2. High Debt Levels Increase Risk

Jefferies reported $12.31 billion of cash and $48.54 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 $1.02 billion of EBITDA over the last 12 months, we view Jefferies’s 35.4× 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’s business quality ultimately falls short of our standards. That said, the stock currently trades at 1.4× forward P/E (or $66.40 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 stocks to buy right now. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.

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