By Jacob Sonenshine

Jefferies Financial Group has a chance at redemption when it reports earnings on Jan. 7 after concerns about its exposure to First Brands' bankruptcy sunk its stock last time around.

Third-quarter earnings were just fine, but they came just as privately owned auto products maker First Brands filed for bankruptcy, causing a selloff in financial stocks. The stock fell even more in October after Jefferies revealed that a fund it managed owned $715 million in First Brands' receivables, then held an investor day on Oct. 16 to try to explain it all. JPMorgan Chase CEO Jamie Dimon's musings about credit "cockroaches," on Oct. 14, only added to the concerns. All told, Jefferies stock dropped 31% from Sept. 18 through Oct. 16.

The stock has rebounded since then, having gained 27%, to $61.97, since its October low, but still has a lot more room to run to get back to where it was in September. Its earnings should be the catalyst to do just that. For one, no further cockroaches have emerged since then, suggesting that the $113 million of Jefferies' own money invested -- less than 1% of its $12.8 billion market value -- might be the extent of the damage.

Now the market can -- and should -- focus on the underlying business. Jefferies is expected to report a fourth-quarter profit of 94 cents on revenue of $2 billion, according to FactSet, and the company has a habit of beating earnings expectations. Last quarter, it beat thanks to higher-than-expected investment banking revenue, which includes fees for mergers and acquisitions and debt capital markets, and has topped bottom-line forecasters in six of the past eight quarters.

Expect more of the same -- without the credit concerns. M&A activity looks ready to grow again next year, partly on the back of trillions of dollars of private-equity cash waiting to plow into new companies. Jefferies, for its part, has grown in the past few years by taking small slices of the deal market, something it said at its investor day that it's looking to continue.

It's been hiring more bankers to service the "middle market," where the smaller deals don't capture the attention of the big banks like JPMorgan and Goldman Sachs. That's why analysts forecast 11% total annual revenue growth to just over $10 billion by 2028, according to FactSet. That could lift profit margins, especially because the increased expenses from that buildout are in the rearview mirror, allowing it to can let the revenue growth flow through. "The clear message was that the year or two ahead should see a moderation in the aggressive hiring and franchise building," writes Oppenheimer analyst Chris Kotowski.

This can help push Jefferies' operating profit margins from 13.5% this year into the midteens, in line with peers like Perella Weinberg Partners, Houlihan Lokey, Lazard, Moelis, and Evercore.

The resulting earnings growth could lift Jefferies' valuation. The stock trades at 13.7 times expected earnings for the coming 12 months, the lower end of the group, and well below Moelis' just over 21.1 times. Jefferies traded in the midteens in September, and could get back there if investors see that it's back on track.

You can take that to the bank.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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January 02, 2026 02:30 ET (07:30 GMT)

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