Jefferies Group Inc., the investment bank that helped rescue Knight Capital Group Inc., dropped the most in eight months in New York trading after reporting earnings that fell short of analysts’ estimates excluding gains from the deal.
Shares of Jefferies declined 6.8 percent to $14.60 at 9:33 a.m., after the company reported net income for the three months ended Aug. 31 of $70.2 million, or 31 cents a share. Earnings adjusted for the Knight Capital transaction were 24 cents a share, compared with the average estimate of five analysts surveyed by Bloomberg for 26 cents.
Jefferies helped arrange a $400 million bailout for Knight Capital earlier this year after trading losses spurred by a software failure. Investors bought convertible securities representing a 73 percent stake in Jersey City, New Jersey-based Knight, and Jefferies converted almost all of the preferred shares it acquired in the transaction to common stock.
“It’s a really unique situation, they were able to buy Knight, and the reality is they still own the shares,” said Douglas Sipkin, an analyst at Susquehanna Financial Group LLLP. “So they’ve taken a gain on it and they still own the shares. They aren’t going to have that gain again.”
Net revenue jumped 45 percent to $738.9 million from last year’s fiscal third quarter. The increase was driven by sales and trading, which more than doubled to $475.7 million. Investment banking revenue fell 11 percent to $260.2 million.
Revenue from fixed-income sales and trading surged to $265.7 million from $33.1 million in the year-earlier period. Equity sales and trading revenue climbed 66 percent to $210 million.
Jefferies set aside $440.4 million, or 60 percent of net revenue, for compensation in the quarter, compared with $299.6 million, or 59 percent, a year earlier. The firm employed 3,814 people at Aug. 31, compared with 3,809 on May 31 and 3,842 on Aug. 31 last year.
Jefferies will probably report “solid financial results” for the rest of the year, Moody’s Investors Service said this month. The rating company said it may still cut Jefferies’s credit grade as it faces the same capital-markets pressures that prompted the downgrade of 15 other banks earlier this year.
The firm has kept leverage down and has a “more liquid, less complex” balance sheet than its larger peers, Moody’s said.