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Jefferies Group, Inc. reported its fiscal third-quarter 2012 (ended August 31) earnings per share of 32 cents in line with the Zacks Consensus Estimate. However, the earnings compared favorably with the prior-year quarter’s earnings of 10 cents.

Results were impacted by escalated non-interest expenses. Yet, higher top-line growth was a positive for the quarter.

After considering certain items including a bargain purchase gain on the Hoare Govett acquisition, a gain on debt extinguishment related to trading activities in debt and impairment charges on intangibles related to the Bache acquisition, Jeffries reported third quarter net income of $70.2 million or 31 cents per share. This compares favorably with the prior-year quarter’s net income of $68.3 million or 30 cents per share.

Performance in Detail

Net revenue climbed 45.1% year over year to $738.9 million, driven by an increase in revenues from principal transactions as well as higher asset management fees and investment income from managed funds. This upside was partially offset by a fall in revenues from commissions, investment banking and interest-related revenues. Moreover, revenue reported also compared favorably with the Zacks Consensus Estimate of $723.0 million.

Non-interest expenses jumped 29.8% year over year to $608.3 million in the quarter. The rise was primarily due to increased compensation and benefits expenses, partially offset by a decline in non-compensation expenses.

Balance Sheet

As of August 31, 2012, total assets were $34.4 million, down 23.7% from $45.1 million as of August 31, 2011. Average total assets were $42.6 million, down 18.1% from $52.0 billion in the prior-year quarter.

As of August 31, 2012, cash and cash equivalents were $2.8 million, up 41.2% from $2.0 million at the end of August 31, 2011, indicating strong cash position of the company.

The adjusted leverage ratio dropped to 8.8% from 11.9% in the prior-year quarter and 9.1% in the prior quarter.

Capital Deployment Update

Concurrent with the earnings release, the Board of Jeffries declared a quarterly dividend of 7.5 cents per share. The dividend will be paid on November 15, 2012 to shareholders of record as of October 15, 2012.

Our Viewpoint

We believe Jeffries has the potential for significant growth in the long run, given its fairly liquid balance sheet. However, persistent regulatory pressures, slow global economic growth and a low-interest rate environment will keep Jeffries’ earnings under pressure in the upcoming quarters.

Currently, Jeffries’ retains a Zacks #3 Rank, which translates into a short-term Hold rating. However, one of its peers Duff & Phelps Corporation retains a Zacks #2 Rank (a short-term Buy rating).


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