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.  

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