* Adjusted EPS 32 cents vs Street view 29 cents
* Q1 EPS 33 cents vs 42 cents a year ago
* Shares up on strong fixed-income trading
By Lauren Tara LaCapra
March 20 (Reuters) - Jefferies Group Inc reported stronger fixed-income trading and underwriting revenue, a signal that Wall Street's most lucrative businesses are staging a comeback.
Profit at the midsize investment bank fell from last year because of higher costs, weak equity trading volumes and a loss in the company's managed funds business. But strength across the company's fixed-income and investment banking businesses suggested that Jefferies had progressed from last fall, when its very viability was being questioned.
The bank reported a profit for its fiscal first quarter, ended Feb. 29, of $77 million, or 33 cents per share, compared with a profit of $87 million, or 42 cents per share, year earlier.
Adjusting for special items, Jefferies earned 32 cents per share compared with the 29 cents per share estimated, on average, by analysts, according to Thomson Reuters I/B/E/S.
"I think the message is: 'We're back playing offense -- as is always the case, guarded offense -- but we're looking to build our company,'" Chief Executive Richard Handler said in an interview.
Jefferies came under intense pressure after the Oct. 31 bankruptcy of brokerage MF Global Holdings Ltd, which crumbled under the weight of its European sovereign debt holdings.
Soon after, bond ratings firm Egan-Jones said Jefferies was in a similarly tenuous position and threatened to downgrade the company to "junk" unless it reduced exposure to European sovereign bonds and raised capital.
Jefferies disputed Egan-Jones' assertions and pointed to what it said were factual errors in its analysis, but its shares came under heavy pressure and signs of a client flight began to appear.
Facing those pressures, management sold billions of dollars worth of Greek, Irish, Italian, Portuguese and Spanish debt in a matter of days and issued strongly worded statements decrying what it called "malicious lies and false rumors."
The strategy worked to regain investor confidence: Jefferies shares have more than doubled since hitting a low of $9.50 in November, and are up 38.6 percent this year as of Monday's close, compared with a 30.4 percent rise in the NYSE Arca Securities Broker/Dealer Index.
"In periods when the world is upside down and the world is on the fringe of systemic risk, there's no place for anyone to hide," said Handler.
"Our goal is to always have a clean balance sheet so we can not only survive those periods but be opportunistic" in terms of making strategic acquisitions and taking market share from rivals, he added.
Jefferies' first-quarter results showed clients coming back to the table, particularly in the bond market, which bodes well for Wall Street rivals Goldman Sachs Group Inc and Morgan Stanley, which are set to report results next month.
Bond trading has historically been one of the most lucrative businesses for Wall Street, but activity has been sluggish over the past two years, in part because of concerns over the solvency of European nations and banks. But actions taken by the European Central Bank and U.S. Federal Reserve to stabilize markets and boost liquidity in late-2011 have led to a revival in bond trading and debt issuance in recent months.
Jefferies' fixed-income trading revenue climbed 6.6 percent, to $339.1 million, making it the biggest revenue line item for the company last quarter. Debt underwriting revenue also rose 42 percent, to $89.7 million, more than offsetting a decline in revenue from stock underwriting.
Handler said the bank has been stealing market share from foreign rivals that have pulled back from the market.
Jefferies' advisory revenue also rose last quarter, despite broad declines in mergers-and-acquisitions volume. The company, which has hired dozens of investment bankers from larger rivals including UBS AG, reported $149.9 million in revenue from that business, up 18.6 percent from a year earlier.
Overall, Jefferies' revenue excluding mandatorily redeemable preferred interest rose 2 percent, to $758.1 million from $741.9 million. Handler said the revenue reflected an annualized rate of $3 billion, compared with $2.5 billion for all of 2011.
Weak stock market conditions were a drag on results, with revenue down in both equities trading and underwriting. As a result, Jefferies made further cuts to equities staff, Chief Financial Officer Peregrine Broadbent said on a conference call.
From the end of its fiscal year through March 1, Jefferies cut over 100 people from its payroll, mostly from equities and related support staff, but it added 84 employees from acquiring Hoare Govett in February and making strategic hires in Jefferies Bache. The net change was 23 fewer employees, though compensation costs rose slightly.
Jefferies shares were recently up 2.4 percent at $19.51 , after rising as high as $19.82.