Results of Piper Jaffray’s Restructuring Are Apparent

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Piper Jaffray Companies reported net income applicable to common shareholders of $9 million, or $0.57 per diluted share, on $110 million of net revenue for the first quarter of 2013. The 7% decrease in revenue from the previous year was due mainly to lower equity underwriting revenue, while the 22% sequential decrease in net revenue was from lower financial advisory.

The $35 million, nearly 80%, decrease in financial advisory revenue was to be expected, as many investment banks reported strong fourthquarter M&A revenue from clients wanting to complete deals before U.S. tax laws changed. Overall, the first quarter’s revenue wasn’t that far off from the company’s trailing two-year quarterly average after accounting for discontinued businesses. We are maintaining our moat rating and don’t anticipate making a material change to our fair value estimate for Piper Jaffray Companies.

Pretax earnings of $18 million, equating to an operating margin of 16.6%, was quite good for the company’s quarterly revenue level. Even if we were to assume a more normalized level of noncompensation expenses that were influenced by one-time items this quarter, we estimate that the operating margin would be approximately 13%. The 13% is a material improvement from the company’s trailing 3-year pro forma quarterly operating margin of a little over 9%.

It is apparent that the company’s restructuring of its international operations and asset management business is having its intended effects. That said, returns on capital remain low, and we still don’t forecast the company earning its cost of capital during our explicit forecast period.

 

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