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On Monday, Morgan Stanley (NYSE:MS) adjusted its stance on Jefferies Group (NYSE: JEF), downgrading the firm’s stock rating from Overweight to Equalweight and significantly reducing the price target to $41.00 from the previous $75.00. The stock, currently trading at $43.14, has experienced significant pressure, falling nearly 20% in the past week and 45% year-to-date, according to InvestingPro data. The revision comes as the financial services company faces challenges that could affect its profit margins despite earlier predictions of market share gains.
The downgrade reflects Morgan Stanley’s concerns about Jefferies Group’s recent hiring spree and its potential impact on the company’s profitability in a challenging capital markets environment. Despite these concerns, InvestingPro data shows the company maintains strong fundamentals with a 78% gross profit margin and has consistently paid dividends for 16 consecutive years, currently yielding 3.7%. Analysts at Morgan Stanley noted that while the increase in managing director (MD) headcount by over 70% since 2019 and 46% since 2021 could lead to market share gains eventually, the immediate effect of compensation guarantees and the time it takes for new hires to become fully productive could weigh on margins.
Jefferies Group has experienced a rise in its core compensation ratio in the first quarter of 2025, which was already one percentage point higher than the previous year. This increase occurred before the latest news on tariff adjustments, suggesting additional pressure on the company’s cost structure.
The analysts also pointed out that Jefferies Group’s fixed income, currencies, and commodities (FICC) trading business may not enjoy the same benefits as its larger peers with a more macro-focused approach. Morgan Stanley projects a 14% year-over-year decline in Jefferies Group’s FICC revenues for 2025, attributing this to wider credit spreads and reduced trading volumes.
Additionally, Jefferies Group’s asset management division faces its own set of challenges. The business is subject to occasional mark-downs and relies on the performance of third-party alternative investments, which adds another layer of uncertainty to the company’s financial outlook. However, InvestingPro analysis suggests the stock is currently undervalued, with a "Fair" overall financial health score. Subscribers can access 6 additional ProTips and detailed valuation metrics to better understand the investment opportunity.
In other recent news, Jefferies Financial Group Inc. reported strong fourth-quarter results, surpassing analyst expectations with earnings and revenue figures. The company posted adjusted earnings per share of $0.91, beating the consensus forecast of $0.87, and reported revenue of $1.96 billion, exceeding the anticipated $1.74 billion. Jefferies saw significant growth in its investment banking sector, with net revenues climbing 73% year-over-year to $987 million, bolstered by record advisory revenues. For the full fiscal year 2024, net revenues reached $7.03 billion, marking a 50% increase from the previous year, while net earnings attributable to common shareholders rose to $669 million.
In addition, Jefferies announced a 14.3% increase in its quarterly dividend to $0.40 per share. UBS analyst Benjamin Rubin recently adjusted the price target for Jefferies Group shares to $75 from $92, maintaining a Buy rating despite the lower-than-expected earnings per share of $0.57. The adjustment was influenced by macroeconomic uncertainties and a slowdown in deal-making activities. Rubin noted that Jefferies Group should trade slightly above its long-term average multiple due to market share gains.
Furthermore, Jefferies released its annual letter to shareholders, providing updates on the company’s performance and strategic initiatives. This communication was part of a regulatory filing with the SEC and serves as an important update for investors.
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