Moody's may downgrade Jefferies; shares falter

NEW YORK - Jefferies Group Inc. shares tumbled Thursday after Moody's Investors Service warned it may downgrade its ratings on the investment firm, which plans to cut 13 percent of its work force by the end of the year.

Shares fell $1.19, or 10 percent, to $10.44 in early afternoon trading. The stock has traded between $7.97 and $29 in the past 12 months, and is down about 50 percent for the year.

Uncertainty about whether the New York-based company can return to a sustainable level of profitability prompted Moody's to place Jefferies' "Baa1" senior unsecured rating on review for possible downgrade Thursday. A "Baa1" rating is investment grade.

Late Wednesday, Jefferies said it will lay off 315 workers by year-end and close three foreign offices to reduce operating expenses.

"We expect the revenue environment for Jefferies to remain challenging in 2009, and possibly beyond," said Alexander Yavorsky, Moody's analyst, in a research note. "While these expense reductions are a necessary and positive step, they may not be enough to return to profitability in this environment."

Jefferies said costs for severance, office closings and write-downs related to its stock-based compensation program should result in charges of about $340 million in the current quarter. Excluding these costs, the company expects to report a net operating loss for the quarter similar to its first-quarter loss of 43 cents per share.

Friedman, Billings, Ramsey & Co. analyst Steve Stelmach subsequently cut his fourth-quarter estimate to a loss of $2.28 per share from a loss of 5 cents per share, to incorporate the one-time charges. He also cut his price target on the stock by $5 to $11.

"While we applaud the renewed focus on expense discipline and infer that management expects a profitable 2009, we have tempered our revenue outlook until there is a discernible improvement in the investment banking and fixed income markets," wrote Stelmach, who maintained a "Market Perform" rating on the shares.

Fox-Pitt Kelton analyst David Trone also reduced his target price on the stock to $14 from $19.

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