Jefferies (JEF) reported a smaller than expected loss Q2 loss on Tuesday, notching a 3 cent loss (better than -$0.10 estimate) on $392 million in revenue (better than $275 million estimate). FBR is therefore raising its target price, citing strong results from the firm’s trading group and reduced fears of big losses from mark-to-market write-downs. FBR is also calling a return to profitability next quarter:
…fears of significant mark-to-market losses have subsided for the time being, helping near-term valuation. The quarter benefited from greater-than-expected gains within the company’s principal trading activities, while the agency commission business and investment banking revenue were essentially in line with our expectations. As JEF managed through a turbulent 2Q08 environment without significant losses and lower leverage, we have fewer concerns regarding balance sheet risk and expect to see a turn to profitability in 3Q08.
JEF’s stronger quarter, however, wasn’t enough to allay all of FBR’s concerns. Fears over a weaker revenue environment going forward, as well as JEF’s poor record of generating returns on higher leverage keep FBR sceptical:
Despite managing through the tempest relatively well, the lack of co,pelling earnings growth and a valuation at the higher end of our comfort range keep us from recommending shares.
FBR adjusts its target price from $15 to $17 and reiterates its Market Perform rating.
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