Jefferies (JEF) Valuation Revisited After New SEC Probe Into First Brands Exposure and Governance Controls

The SEC’s new probe into Jefferies Financial Group (JEF) and its disclosures around exposure to bankrupt First Brands Group has pushed the stock back under the microscope for anyone tracking risk and governance.

See our latest analysis for Jefferies Financial Group.

Those concerns are colliding with a mixed price backdrop, with Jefferies’ share price at $58.41 after a 1 month share price return of 10.39 percent but a year to date share price return of negative 26.08 percent. Its 5 year total shareholder return of 199.01 percent suggests the longer term story has been much stronger even as near term momentum has clearly faded.

If this kind of regulatory headline has you rethinking your financials exposure, it might be a good time to explore fast growing stocks with high insider ownership as potential alternative ideas.

With Jefferies still trading more than 10 percent below consensus targets despite solid multi year returns, investors now face a tougher question: is this regulatory setback masking an undervalued franchise, or is the market rightly marking down future growth?

Price-to-Earnings of 18.8x: Is it justified?

Jefferies current share price of $58.41 comes with a price to earnings ratio of 18.8x, which screens as slightly expensive versus its fair ratio.

The price to earnings multiple compares what investors pay today for each dollar of current earnings and is a central yardstick for capital markets firms like Jefferies where profits can be cyclical. At 18.8x, investors are effectively paying a modest premium to the model implied fair price to earnings multiple of 17.9x. This suggests the market is building in expectations that recent earnings momentum can continue.

Against that backdrop, the stock looks inexpensive when lined up against the broader US Capital Markets industry at 23.8x and the narrower peer group at 20.9x. This gap points to the market assigning Jefferies a lower rating than many competitors despite its faster recent earnings growth. If sentiment or earnings visibility improve, there may be room for the multiple to move back toward the 17.9x level flagged by the fair ratio analysis or closer to industry norms.

Explore the SWS fair ratio for Jefferies Financial Group

Result: Price-to-Earnings of 18.8x (ABOUT RIGHT)

However, regulatory scrutiny around First Brands exposure, as well as any slowdown in deal activity or trading revenues, could quickly challenge the current valuation resilience.

Find out about the key risks to this Jefferies Financial Group narrative.

Another View on Value

Our DCF model paints a very different picture, suggesting Jefferies is trading above its estimated fair value. While earnings based multiples say the stock looks roughly reasonable, the cash flow view implies investors may be paying up for growth that has to be delivered. Which story do you trust more?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Jefferies Financial Group for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 917 undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Jefferies Financial Group Narrative

If you see the numbers differently or want to stress test your own assumptions, you can build a personalized view in just minutes: Do it your way.

A great starting point for your Jefferies Financial Group research is our analysis highlighting 3 key rewards and 1 important warning sign that could impact your investment decision.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.