Jefferies missed fourth quarter estimates but is optimistic about 2024.

The fourth quarter earnings season begins in earnest this week, and the investment bank is the first major financial company to announce earnings. Jefferies Financial Group (NYSE:JEF) did not perform as well as expected.

The company missed analyst estimates for revenue and revenue, but there were hopes for some bright spots and improved results for 2024. Jefferies shares were down about 1% in Tuesday morning trading.

Investment banking on the rise

In the fourth quarter of the fiscal year that ended Nov. 30, Jefferies reported revenue of $1.2 billion, down 17% from a year ago. The consensus among analysts was for revenue of $1.24 billion. Net income for the quarter fell 53% to $66 million, or 29 cents per share, below consensus estimates of 34 cents per share.

The biggest drag on profits was preferred stock dividend payments of $6.3 million, up 204% from the previous year.

For the full year, Jefferies’ revenue fell 21% to $4.7 billion, while net income fell 66% to $263 million.

The low numbers aren’t surprising, considering that Jefferies generates most of its revenue from investment banking. Additionally, mergers and acquisitions (M&A) decreased by 14% in 2023, and deal value was 41% lower than the previous year.

For Jefferies, investment banking revenue fell 5% to $4.5 billion in fiscal 2023. But the fiscal fourth quarter showed positive signs for the company, with investment banking revenue rising 1% to $1.1 billion.

From a historical perspective, CEO Richard Handler and President Brian Friedman said the numbers aren’t that bad.

“However, going back to 2019, which better represents the last ‘normal’ year for our industry, our current results compare significantly to 2019’s investment banking net income of $1.6 billion and stocks and bonds net income of $1.5 billion. “They said.

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So while investors can take a half-empty or glass-half-full view of Jefferies earnings, there are a few bright spots on the horizon.

Jefferies has been using the lull in activity to expand its roster of managing directors, individuals who build relationships and execute deals. It has added 182 managing directors over the past three years and has expanded rapidly, with increases of 78% in Europe and 150% in Asia Pacific, and now has 364.

Jefferies’ leadership sees 2023 as a transitional year and the worst year for the investment bank. That’s because 2024 is expected to be much better with declining inflation, expectations of interest rate cuts, and a lot of pent-up demand.

“In my more than 55 years at Jefferies, I have never seen our company in a better position. We have a simple path to a unique global franchise that can deliver superior long-term total returns to shareholders through low-risk investment banking revenue generation. It is the foundation of our growth, our diverse sales, trading and research platforms that serve our clients, and our strong alternative asset management business,” Handler and Friedman said in the company’s 2023 shareholder letter.

Leadership did not provide guidance, but analysts’ consensus is that the price target is $47 per share, which would be about a 15% increase from the current price of $40 per share.

Jefferies’ stock is up 27% for the year, most of that in the final two months of the year, thanks to moves seen as a more accommodative stance by the Federal Reserve on interest rates. The company’s price-to-earnings ratio (P/E) has soared up to 29 as of the end of 2023, but with the market expecting earnings to improve in 2024, a forward P/E of 10 is more reasonable.

Conclusion: Jefferies looks quite attractive in 2024 as well.