Wednesday, September 21, 2011

LUK: Leucadia National at Book Value

A lot about investing is about finding the right people.  If you can find smart people to run your money and just give them the money, that's a good thing.  This is why I like to follow companies that are run by outstanding management with a long history of outperformance.  Of course, Buffett's Berkshire Hathaway (BRK) is one of those companies.  There are others, although most won't have the long term track record of a Buffett.

One of my favorite companies has been Leucadia National (LUK).  It is run by the duo Joe Steinberg and Ian Cumming.  They have been running Leucadia National since 1978.

This is one of those companies, like BRK, where it is worth your time reading their annual reports, going back as far as you can.  Reading reports by these really smart, straight shooters is very educational; you will learn a LOT.

Anyway, like BRK, they do have their performance of the company since they started running it on the first page of their annual report. You can see it here.  (I love how they put all that information right up at the front.  I wondered why more companies don't do that, until I realize most companies can't create a long term track record like that!  Some try to do it and then stop when their numbers start to look bad, lol...)

The returns are absolutely amazing.  Since 1979 through 2010, a period of 30 years, they have increased book value per share of LUK by 19.6% per year.  

OK, OK, there was a big bull market from 1979-2000.  It was easy to make money during that period.  How have they done since 2000 when the market has been flat? 

Here are the annualized returns for the five and ten year periods:

Annualized growth in book value per share:
Five years    +11.0%
Ten years     +14.7%
(30 years      +19.6%)

So in a flat market, they were able to increase the per share value of the company by double digits.  That's pretty good.  

And again, as I argued in the JPM and BRK posts, these five and ten years have not been kind to businesses.  They include all the things like 9/11, two wars, two historic bear markets, near-Great-Depression, huge catastrophes etc...

If you go back to the year 2000 and tell someone exactly what will happen in the next decade (starting with the popping of the internet stock bubble, a 50% decline in the S&P 500 index, 80% decline in the NASDAQ index, Both World Trade Centers collapsing due to terrorism, wars because of that, oil going up to $150/barrel, big financial crisis, housing depression, extended high unemployment etc...), and ask them what would happen to firms like LUK, BRK, or JPM, I don't think anyone would have guessed they would increase book value per share by double digits despite all that.  I highly doubt that.

(This sort of goes back to my other argument about the futility of predicting things.)

Anyway, so you have a company with a great long term track record and a pretty good short term track record even in the worst environment ever run by some of the shrewdest investors around, you have to be interested.

And if you can buy into such a company at book value, with no premium at all, that is really something.  

In the past 31 years, the price-to-book value ratio of LUK has averaged around 1.0: it has traded right around book.  But that may be because they were largely an insurance company early on. 

In the past ten years, however, and ironically in a harsh economic environment (and not the bubbly and wonderful 1980s and 1990s) the price-to-book value ratios has averaged 1.5x. 

There is no reason to believe it will go right back up to 1.5x book value ratio, but if it did, that's a 50% return right there without LUK management lifting a finger. 

So what does LUK actually do?  At this point, they are a conglomerate.  Think of LUK as a private equity fund, or a concentrated equity fund.  They own large, concentrated positions in listed companies such as Jeffries Group, Fortescue Metals Group (an Australian iron ore company that has been a home run for LUK),  and Inmet Mining, just to name some large positions. 

They do own a bunch of privately held (not listed) businesses as well, though they tend to be smaller and to me not the real drivers of LUK's value/worth. 

They have started to wind down their large position in Fortescue Metals Group and have sold their large position in Americredit, a subprime auto finance company they bought during the financial crisis.

Their investment style is typically to invest big in distressed or special situations.

Anyway, the book value of this company, currently as I estimate it is around $25.20/share and the stock price closed at $25.23/share today.  You are getting this awesome management with no premium at all.

These guys are real straight shooters (notice how I tend to like those kinds of people?) so I do trust that their balance sheet is marked conservatively.  Their large equity holdings are marked to market (and I did adjust for that since the market has declined since their last balance sheet date at the end of June 2011).

As usual, there are risks.  Both Cumming and Steinberg are not young, so they probably will not be managing this entity for the next twenty years.  I don't really understand what their endgame is going to be, but from what they have been saying in the annual meetings in the past few years, I think they are working very hard to structure LUK into a sustainable business model like BRK.

Don't just go out and buy this stock because you read a nice blog post on the internet.  Read their annual reports. Do some research.  Get comfortable.  Only then, maybe buy some stock.  I do own some but often trade in and out of it as it gets expensive or cheap.

Anyway, this is just an intial post to point out a cheap stock of high quality.  Over time, I may post more about LUK in detail.  

2 comments:

  1. Problem: HP Printer not connecting to my laptop.
    I had an issue while connecting my 2 year old HP printer to my brother's laptop that I had borrowed for starting my own business. I used a quick google search to fix the problem but that did not help me. I then decided to get professional help to solve my problem. After having received many quotations from various companies, i decided to go ahead with Online Tech Repair (www.onlinetechrepairs.com).
    Reasons I chose them over the others:
    1) They were extremely friendly and patient with me during my initial discussions and responded promptly to my request.
    2) Their prices were extremely reasonable.
    3) They were ready and willing to walk me through the entire process step by step and were on call with me till i got it fixed.
    How did they do it
    1) They first asked me to state my problem clearly and asked me a few questions. This was done to detect any physical connectivity issues with the printer.
    2) After having answered this, they confirmed that the printer and the laptop were functioning correctly.
    3) They then, asked me if they could access my laptop remotely to troubleshoot the problem and fix it. I agreed.
    4) One of the tech support executives accessed my laptop and started troubleshooting.
    5) I sat back and watched as the tech support executive was navigating my laptop to spot the issue. The issue was fixed.
    6) I was told that it was due to an older version of the driver that had been installed.
    My Experience I loved the entire friendly conversation that took place with them. They understood my needs clearly and acted upon the solution immediately. Being a technical noob, i sometimes find it difficult to communicate with tech support teams. It was a very
    different experience with the guys at Online Tech Repairs. You can check out their website www.onlinetechrepairs.com or call them on 1-914-613-3786.
    Would definitely recommend this service to anyone who needs help fixing their computers.
    Thanks a ton guys. Great Job....!

    ReplyDelete
  2. Is Your VIRUS REMOVAL
    Computer Sluggish or Plagued With a Virus? – If So you Need Online Tech Repairs
    As a leader in online computer repair, Online Tech Repairs Inc has the experience to deliver professional system optimization and virus removal.Headquartered in Great Neck, New York our certified technicians have been providing online computer repair and virus removal for customers around the world since 2004.
    Our three step system is easy to use; and provides you a safe, unobtrusive, and cost effective alternative to your computer service needs. By using state-of-the-art technology our computer experts can diagnose, and repair your computer system through the internet, no matter where you are.
    Our technician will guide you through the installation of Online Tech Repair Inc secure software. This software allows your dedicated computer expert to see and operate your computer just as if he was in the room with you. That means you don't have to unplug everything and bring it to our shop, or have a stranger tramping through your home.
    From our remote location the Online Tech Repairs.com expert can handle any computer issue you want addressed, like:
    • - System Optimization
    • - How it works Software Installations or Upgrades
    • - How it works Virus Removal
    • - How it works Home Network Set-ups
    Just to name a few.
    If you are unsure of what the problem may be, that is okay. We can run a complete diagnostic on your system and fix the problems we encounter. When we are done our software is removed; leaving you with a safe, secure and properly functioning system. The whole process usually takes less than an hour. You probably couldn't even get your computer to your local repair shop that fast!
    Call us now for a FREE COMPUTER DIAGONISTIC using DISCOUNT CODE (otr214430@gmail.com) on +1-914-613-3786 or chat with us on www.onlinetechrepairs.com.

    ReplyDelete

Note: Only a member of this blog may post a comment.