Jefferies shares fall, analyst cuts price target

Jefferies shares fall, analyst cuts price target

Stock Market Predictions

(Global Markets) - Shares of Jefferies Group Inc (JEF.N) fell on Friday as a Keefe, Bruyette & Woods analyst cut her price target on the stock, saying stricter regulation of its leverage and funding could meaningfully reduce earnings.

Jefferies shares were down 3.8 percent at $11.55 in morning trade on the New York Stock Exchange, after falling as low as $11.12.

KBW analyst Lauren Smith lowered her price target on Jefferies to $17 from $22, after running a scenario to quantify the impact of Jefferies shifting its funding and leverage to a model more like those used by Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N).

Smith said such a move would raise Jeffries' interest costs by $350 million per year and lower its earnings by 50 cents per share -- more than one-third of its estimated earnings for 2012, according to Thomson Global Markets I/B/E/S.

"We believe the continued overhang of increased regulatory oversight and the speculation for the potential negative impact on EPS could limit a recovery in the stock price," said Smith.

On Thursday, Jefferies shares fell as much as 20 percent, and were briefly halted, before closing down 2 percent at $12.01.

Initial worries about the company's exposure to Europe were damped by the bank's disclosure that it has a net short position on troubled sovereign debt. Yet analysts have also been citing concern that the quick downfall of competitor MF Global Holdings Ltd (MFGLQ.PK), which filed for bankruptcy protection on Monday, could lead to stricter regulation of small Wall Street firms like Jefferies.

Holdings of sovereign debt from Belgium, Ireland, Italy, Portugal and Spain and a heavy reliance on overnight loans crippled MF Global's ability to fund itself and retain clients.

After MF Global sought bankruptcy protection, ratings agency Egan Jones downgraded Jefferies, saying the bank is also too highly leveraged with a heavy reliance on short-term debt.

Analysts and company executives have dismissed comparisons to MF Global, arguing that Jefferies does not take on the same kind of proprietary risks nor does it have as much leverage.

Oppenheimer analyst Chris Kotowski issued a report on Jefferies titled "Drawing Some Differences with MF Global." He noted that Jefferies' leverage ratio was 14 to 1 as of September 30, compared with 34 to 1 for MF Global.

Kotowski characterized Jefferies as "a very conservatively run firm" and said the recent sell-off is "overdone."

Yet the potential for a regulatory crackdown on Jefferies cannot be dismissed, analysts said.

"There may be a frenzy of new regulation aimed at unregulated financial companies," Rochdale Securities analyst Richard Bove said in a report on Tuesday. "Jefferies could be impacted by such a development."

KBW's Smith said Jefferies shares will trade in line with larger and more tightly regulated Wall Street rivals for the near term. Her new $17 price target for Jefferies represents 122 percent of tangible book value. Morgan Stanley trades at 54 percent of its September 30 tangible book value, while Goldman trades at 89 percent of tangible book value.

(Reporting by Lauren Tara LaCapra in New York; Editing by Matthew Lewis and Steve Orlofsky)