Oppenheimer Calls Egan-Jones a 'Hack' on Jefferies (JEF)

With shares of Jefferies (NYSE: JEF) down nearly 25 percent in November, both investors and clients are scrambling for answers. While most analysts are in a similar boat, Oppenheimer's Chris Kotowski is sticking his neck out Wednesday in an attempt to provide some of those answers.

Concerns related to Jefferies were first heard late last month amid speculation about the company's exposure to the infamous PIIGS, exacerbated by the MF Global collapse. The rumor escalated into near panic as credit-rating firm Egan-Jones downgraded Jefferies on November 2nd.

Fast forward about 20 days: despite numerous rebuttals from the company, a defense from notable bank analyst Meredith Whitney and a number of key insider buys from Jefferies largest holder, Leucadia, Jefferies shares have fallen from over $13 to about $10.

Enter Kotowski, whose call is more so a rip on Egan-Jones than a pound-the-table defense on Jefferies operations (i.e. he maintains a Perform rating on the stock). Kotowski points out a number of flaws in the Egan-Jones report:

• the firm's analysis showed total sales of just $524 million during Jefferies FY10 and sales of $897 million for this year. In contrast, Kotowski estimates Jefferies 2010 sales are running at about a $2.4 billion annualized rate and about $2.7 billion for this year;
  
  
• Egan-Jones claimed Jefferies operating margin declined to 0 percent during the fiscal 2010. According to Kotowski, Jefferies earned $397 million on sales of $2.2 billion during last year, equating to an operating margin of 18.1 percent, and
  
  
• increases in the size of Jefferies' assets in the Egan-Jones report "are so grotesquely wrong they should immediately jump off the page to anyone remotely familiar with the numbers." The firm predicts Jefferies' assets "to increase from $45B today to $67B by fiscal year-end, to $102B in 2012 and to $153B in 2013."

While the Oppenheimer analysis seems to ring true, Kotowski's conclusion: "...we doubt that the market will pay much heed given the gross miscalculations we see in this report," can be quickly debunked by looking at a 1-month chart of Jefferies stock price.

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