These two conglomerates — Leucadia National (LUK) and Loews (L) — are sometimes compared to Warren Buffett’s Berkshire Hathaway (BRK.A). In fact, Leucadia has a commercial mortgage joint venture with Berkshire called Berkadia, notes Gavin Graham, contributing editor to Internet Wealth Builder.
Apart from the mid-market investment bank Jefferies and Berkadia, Leucadia also owns 78% of National Beef, the second largest beef processor in the U.S. Its portfolio also includes Idaho Timber, a chain of auto dealerships (Garcadia), a rapidly growing Italian wireless broadband business with 500,000 subscribers (Linkem), and a couple of smaller financial investment groups, HRG and FXCM.
Loews owns 90% of insurer CNA Financial (CNA), 53% of driller Diamond Offshore (DO), 51% of pipeline company Boardwalk Pipeline Partners (BWP), and 100% of rigid plastic container manufacturer Consolidated Container Corporation, as well as 100% of the eponymous Loews’ Hotels.
Both conglomerates sell at large discounts to their tangible book values, Leucadia at 15% and Loews at 30%. Let’s look at Leucadia first. Apart from the disposals of plastics business Conwed and HRG’s Fidelity and Guaranty Life subsidiary, the company recently announced a major strategic reorientation.
This includes the sale of 48% of National Beef to Marfrig Global Foods S.A. for $1.05 billion, realizing an estimated pre-tax gain of $800 million-$850 million. It retains a 31% position. It also announced the sale of its Garcadia auto-dealership to its partners.
To reflect the increased importance of its Jefferies banking business after these disposals, management has proposed changing the company’s name to Jefferies. These sales reflect the gradual transformation of Leucadia from an opportunistic acquirer of assets to becoming a more focused financial services business that still retains an eye for a deal.
Recent developments at Loews include a 75% increase in net income for 2017 to $1.16 billion ($3.45 per share) from $654 million ($1.93 per share) in 2016. While helped by a $200 million ($0.59 per share) benefit from the tax reduction bill, earnings still increased almost 50% to $964 million ($2.86 per share), boosted by better insurance underwriting and lower losses from asbestos liabilities for CNA.
Also contributing were lower write-downs from Diamond Offshore and slightly lower earnings from Boardwalk on the sale of a processing plant. Loews Hotels benefited from better occupancy rates.
Book value, which, as with Berkshire Hathaway, is regarded as the most useful guide to performance at Loews, rose 6% to $57.91, meaning Loews sells at substantial discount to the sum of its parts.
Both stocks, which have been largely flat over the last few years, remain attractively valued and are taking action to realize their underlying values. They remain rated as Buys.
Gavin Graham is contributing editor to Internet Wealth Builder.
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