Friday, July 26, 2013

Leucadia National Annual Meeting 2013

So I did make it to the Leucadia National (LUK) annual meeting this year.  As usual, these aren't comprehensive notes or anything like that. These are just some loose notes on certain things.   I didn't take detailed notes so some things might be a little off here and there, but I don't think I am off in the general ideas that were talked about.

First of all, both Steinberg and Cumming were there but since Cumming is no longer chairman, he sat in the audience and Steinberg made some introductory remarks and did the usual annual meeting stuff and then Richard Handler took over and ran the rest of the meeting.

This may be a first, but LUK had a slide show for this meeting.  You can see it here.  (Of course I did wonder for a second if Berkshire Hathaway will have a slide show in the post-Buffett era.)

Here is the first slide:

For the Berkheads that need to know, Berkshire Hathaway returned +15.7%/year from 1990 through 2012. But the JEF figures exclude dividends and the LUK figures exclude the special dividend back in 1999 (the HomeFed spinoff is also not included).

The meeting didn't seem as crowded as last year, but I can't say for sure.  The whole vibe of the meeting was a little different as it wasn't a Cumming and Steinberg show.

Anyway, Richard Handler did a really good job, I think, and people should feel comfortable that LUK is in good hands (even though it is now a very different entity so I totally understand people getting out now).  He talked a lot about the things he thinks are really important; act like owners, emphasis on risk management, diversification; avoid all-in bets, importance of balance sheet strength, capital structure etc.  He did say that protecting bondholders through the cycle is important for shareholders.

He said that what LUK has now is really good and he is excited about it; strong balance sheet / capital, good businesses.  This will be the basis of a lot of opportunity to create value over the next 5, 10, 15 years.

The culture at Jeffries (and LUK) is about honesty, high integrity, long-term greedy, acting like owners, non-bureaucratic, no arrogance (he said arrogance was the downfall of many companies), stay humble, do good things in good times and you'll get through the bad times.  He said that one thing he learned from Cumming / Steinberg is that even with their tremendous track record of success, they stayed humble and never got arrogant.   When you get arrogant, you start to think bad things can't happen to you.

Sees great opportunity in the investment bank / merchant banking model.  I forgot what this comment had to do with anything, but Handler said that Cumming and Steinberg rarely agreed on anything, but when they did things turned out really great.

Complicated Company
Handler said that LUK is a complicated company with a lot of moving parts but what they will focus on is how to build book value per share (BPS) over time.  He thinks they will create a lot of value.

President Brian Friedman briefly went through the various business lines mostly just saying that he sees upside in all of the areas and feels good about them.  The exception seemed to be Sangart where he said we will have to see how it develops.  Not in the list above is the Oregon LNG project which Friedman says has a lot of potential, but also a lot of work to do to get it realized (regulatory issues etc.).

He said LUK will focus on opportunities not available to the public, not run-of-the-mill things.

In early July, LUK bought Topwater Capital, a fund of funds business.  It's small, but there is a lot of potential to build it up over time.

National Beef
Founding partner and current CEO of National Beef, Tim Klein, also made a quick presentation of his business.

The key points are that National Beef is focused on going up the value chain to improve margins.  They are also processing / selling hide to improve margins.   U.S. is now a beef exporter and demand is expected to increase over time globally (increasing demand for protein).

They bought the rest of Kansas City Steaks as part of their plan to go up the value chain.  I think he said that Omaha Steaks does $400 million in revenues and Kansas City Steaks does only $20 million so there is a lot of potential.   There was no mention of (nor were there questions) any sort of discount to LUK shareholders. Klein said that the problem with lower cattle supplies due to the drought is ending as ranchers are starting to build up their herds again, but it may be two or three years before we start to see that coming back into the supply chain (I assume that means that it will take that long to see increasing volumes and improving margins).

LUK initially invested $217 million in Berkadia and as of July 2013 $191 million has already been paid out, and there is still "substantial value" going forward.

There is tremendous upside if interest rates go up, especially short term interest rates.

Scale matters in this business, so there is a lot of consolidation potential to come.

Garcadia is another roll-up type business where the industry is really fragmented.

Jefferies has been listed for a long time so I think many people are well aware of their business.  It has grown a bunch into a full service, global investment bank since 1990 when they were primarily a cash equities business with 140 employees and $7 million in net income. Handler mentioned a number of times that they don't engage in proprietary trading and are very client focused.

My comment:  Their ROE over the years is not as good as some of the majors, but that is probably due to JEF's not getting involved with proprietary trading, derivatives, internal hedge funds etc.  So it's possible that they are not as impacted going forward by many of these new regulations.  So on that basis, JEF can be interesting to people who do worry about that sort of thing at GS, JPM etc...  But that's just a thought.

OK, so these were some of the slides and comments from the various businesses where the CEOs were present.

Here are some Q&A's, not word for word or anything like that

Rogue Traders
Someone mentioned that LUK shareholders never had to worry about rogue traders, but now with JEF, they do.  How can LUK shareholders feel comfortable with that risk?

Handler said that to prevent that sort of thing, they are focused on:

  • culture
  • transparent, listed securities that settle in a short time; they don't do long-dated, illiquid securities. 
  • have systems in place to see positions, VAR etc...
  • empower the risk committee
He said no business is 100% safe in any business, but if they stay focused on doing the right things, they can minimize the risk. 

Earnings Power of JEF in a Good Year?
Handler says that the world keeps changing so it would be misleading if he said what JEF can make in a good year.   He said they aim to make low-to-mid teens returns through the cycle (I assume that's ROE, which is consistent with JEF's past). 

Sangart Update? 
This question was tossed to Steinberg who simply said, "It's on life support".   Handler said that it's been written down so the there is upside, not downside (my comment: well, they can keep losing money in which case that would still be downside; just because a problem is not on the balance sheet doesn't mean it can't bleed us through the income statement). 

National Beef
My mind was wandering but I think there was a question regarding Walmart and National Beef.  I just remember some comments about that being a low margin business and the risks of having such a big part of the business with one customer.  I don't know if Klein made it sound like "good riddance", but Handler later stated that even if it's low margin they would have liked to keep the business.

Compensation Ratio at JEF
There was a question regarding the compensation ratio at JEF due to JEF going private.  What are the implications of that (private versus public company).  Handler said it has nothing to do with it.  But he says the comp ratio in the high 50s will come down as that was pushed up by a lot of hiring in the past three years (due to the opportunity).  The hiring has peaked so compensation expensed due to that will start to come down.  Also, as revenues rise, operating leverage should kick in bringing down the comp ratio.

Rising Interest Rates
Someone pointed out that JEF's competitors had a good quarter and JEF was not so great. Handler responded by saying that the volatility in the fixed income markets helps competitors' fixed income derivatives business.  In this environment, that business is like a license to print money.  JEF doesn't have that business, but then they didn't have it four years ago and it blew up some competitors back then.

Monetize or Hold LUK Investments?
They like the businesses they own; good businesses, scalable and throwing off cash.  There are benefits also to the various businesses in terms of idea generation (more eyes on the ground).  Can't say what LUK will look like in the future.  They will just be smart and avoid mistakes.

National Beef
Someone compared National Beef to Smithfield.  Smithfield is two times bigger (revenues and EBITDA)  than National Beef, but the Chinese are paying 4x as much.   Is National Beef worth more?  Klein said that the beef industry always tended to trade at lower multiples than pork.

Infrastructure Investments? 
Someone asked if LUK will get into infrastructure investing.  Friedman pointed out that the LNG business is an infrastructure investment.  But he pointed out that the usual 'infrastructure' investments like toll roads and things like that are for rate-of-return capital;  it is a fixed income alternative so there is a lot of capital chasing those deals.  Fixed income alternative / rate-of-return-type deals just isn't LUK's business.

How Does Handler / Friedman Allocate Time Between LUK and JEF?
Handler pointed out that the various businesses have their own CEOs (and on the JEF side, I guess division heads) and other operating managers that do their job well.  Handler said that it feels like he spends 60% / 60% between the two.  So I take that to mean he splits his time 50/50 between the two.

What is a "Dumb" Thing?
Someone asked, what exactly is a "dumb" thing?  Handler keeps talking about avoiding doing "dumb" things, but mistakes are obvious usually in hindsight.  So what exactly constitutes "dumb"?

Handler said he has been in the business a very long time and has seen very smart people do very stupid things.  He talked about how a great company levered up 35-to-1 and drove itself off a cliff.  Illiquid products that nobody can value has caused trouble.  Bad emails (referring to the Fabulous Fab trial going on at the time).  Avoid arrogance, thinking that you can't make a mistake.  Always have humility and excess capital.

Steinberg jumped in and said that in a nutshell, you don't want to have a margin call.  If you have a margin call, you're finished.  That's what LUK has been about.

Share Repurchases
Berkshire Hathaway has a 1.2x BPS repurchase policy.  What is Handler's view on buybacks?  Have they done any?

Handler said they bought some JEF stock back at the time of the merger.  Post merger, they have a 25 million share authority.   They will be opportunistic on share repurchases.

Does Book Value Approximate Intrinsic Value?
Handler said "that's your decision, not mine".

Which is More Important:  BPS Growth or Shareholder Return?
Handler said early on that they will focus on increasing BPS.  But Handler said shareholder return of course is the ultimate goal, but growing BPS will drive that shareholder return.

Who Makes Decision on Non-financial Acquisitions?
The questioner said something about how LUK built a team and Steinberg said that he never thought of it that way, but they have a great team.  On acquisitions, the board will make the decision.   The questioner probably wanted to know who is going to drive the process when an idea comes up; will it be Handler, Friedman, Steinberg?  I would guess they would all discuss it together so no one person is going to make the call.  They then present it to the board etc...

How Does Steinberg Manage His Time?
Someone asked about his new role, and how he will be spending his time; does he come to work every day? After talking about new office arrangements and some moves (Justin Wheeler moving to NYC etc...), he just said, "We're having fun".

Bank Deals
Someone asked about a small bank deal that JEF was involved in recently.  Is this a trend? Will they see more bank deals?  Friedman said that JEF had a good market share in that sector this week (or last week). This is not driven by Dodd-Frank, but more from capital requirements.  JEF has been waiting for a wave of deals here, but it hasn't really happened, but it will eventually.  The biggest barrier to the deal flow in this area is 'cultural'.  People don't want to give up their CEO-ship.

I don't know if that was the last question, but that's the last thing in my notebook.

Anyway, the meeting started promptly at around 10:00 a.m. and I think it ended at 11:45 am or so (I don't take notes on that sort of thing so I may be off).

I think Handler and Friedman were really good and reasonable and do seem to share the same sort of values as Cumming/Steinberg.   I personally don't have any problem with Handler/Friedman.  I do understand that many in the value investing community are just totally allergic to investment banks.  There is nothing I can really say to those folks.  If they don't like investment banks and bankers, well, then they should just avoid them.   That's totally fine.

But this is not the old LUK either.


  1. Thanks for the great summary!

  2. Thank you KK. Looks like it is still too early to tell if anything has changed at LUK. But JEF and some of the major subsidiaries should continue to do well.

  3. Notice that the only investment at LUK (equity) is COWN (sold IFMI stake during quarter).

    1. COWN is interesting... It's like the who's who of 1980s wall street... You'll see some names there that brings back a lot of memories, but haven't been very visible in recent years.

      Do you mean Intl FCStone, the old IAAC? I didn't like them after the merger as I tend to not like the commodity futures brokerage business... (Refco, MF Global etc... you get the picture. The MF Global blowup had nothing to do with the commodity future brokerage business, but it was such a horrible business and that was why they had to do something else (that lead to the blowup).

      Thanks for reading.

  4. Thanks for the notes. I also attended the meeting and liked some of Richard Handler comments:

    - Diversification is a good thing in life.
    - We have a unique canvas, capital, expertise, we are opportunistic and patient.
    - Our organization is honest, has integrity, is non bureaucratic, has a sens of urgency.
    - Jefferies is our secret weapon in order to add value to LUK.
    - The Oregon Liquefied natural gas project is BIG.

    1. Thanks for filling some stuff in.

      Yes, they did say Oregon is BIG, but that there is still a lot of work to do (implying that payoff may not be too close...)

      It was a good meeting. I think people should feel good about where LUK is now.

  5. Always have humility and excess capital
    i'm going to get that tattooed on my right finger so I can see it every time i click buy on my etrade account.

  6. How do you feel the National Beef recall of 50,000 pounds of ground beef will effect LUK? They were up 2% on the news, I guess the street isn't concerned.

    And thanks for covering the meeting.

    1. Hi,

      I don't know, but I wouldn't worry too much about it. Recalls do happen now and then. As long as they track it down and fix it, I don't think it should be a problem.

      Thanks for reading.

  7. Thanks for the report. Always very interesting to see these recaps of the meetings. I'm on the West Coast -- one of these years, hope to make it to New York around the time of a meeting.

  8. Hi I was wondering if you could do a post about Oaktree, you haven't made one in a while.

    1. Hi,

      Yeah, I've been following OAK and I still own it. I really like what's happening there despite my concern that interest rates are looking bottom-ish and therefore maybe tough for fixed income managers going forward.

      But OAK is really doing well and they will be there for the next blowup to pick up the pieces. It seems like they are building out their infrastructure and getting new strategies in place, so I am not so worried.

      Plus, I still have that nagging sense that interest rates can stay lower than most people think for longer than people think (like Japan); there is so much debt out there that it's hard to see rates rising, which I would see as a function of increasing demand for loans.

      As for updating OAK, I don't know if there is really any point in posting updates on a quarter by quarter basis or even yearly if nothing really substantial happens; like a big deal or dramatic change in valuation or some such... And I don't see that.

      One thing I would say, though, is that they are doing really well now but you can't 'capitalize' or price in what they are making in recent months or past year as they are cashing out and realizing some really nice gains in some funds. This can't be annualized, or assumed to be 'normal' earnings.

      But other than that, the AUM level is pretty stable (despite paying back substantial amounts to investors) and the management is the same, so my view hasn't changed a whole lot.

      Of course, the interest rate moves may hit DoubleLine more than OAK itself, but even there, over time, they should do really well. And besides, as I said in one of the posts, DL is not a huge part of OAK at this point anyway. I suppose the question is how big it can get over the next decade or so; not so much how it performs in the near term.

      Anyway, thanks for reading!

  9. Any thoughts on the recent LUK call ( or excuse for a call)? Jefferies out with Q1 today and looks good, but that seems to be more about a rising tide more so than the Captains supremacy per se.
    I'd be interested in any thoughts you have. Best, Peter

    1. No new thoughts. It is no longer the C/S show, but that doesn't mean they can't do well. The structure looks good and the people seem good too, but I don't know if we can really learn anything on a quarter-to-quarter basis, necessarily. It's going to depend on how they deploy capital going forward, grow the businesses and things like that so it might take some time before we notice anything interesting to talk about.

  10. Might be worth a fresh look on this one. LUK has quietly gotten pretty cheap over the last year. If you back out the cash and marketable securities, you are getting the earnings from Jefferies, Berkadia, Garcadia and beef for around 7.5x to 8x. And that assumes things like Oregon LNG and Leucadia Asset Management are zeros.

    1. Thanks for the the update. I think they will keep creating value so will get cheaper if the stock doesn't move. I may post something at some point. Investment banks are still valued cheaply, though, but LUK looks cheaper at 7.5-8x.

    2. getting really cheap now.... .9x book for a company with a track record of growing book over time?

      time for an update post!

    3. Hi, I've been thinking about posting an update but nothing much has happened yet. They did clean up some old stuff (Sangart etc.) and I do like the people and assets; it should do well over time.

      The valuation can be tricky, though, because there is $1.7 billion of goodwill on the b/s that comes from the LUK/Jefferies merger. So this wouldn't be comparable to the premerger JEF if you include the goodwill.

      The goodwill comes to $4.8/share or so, so the BPS on a tangible basis would be around $23.20 instead of $28, so the stock would be more like 1.07x tangible book.

      That's still not bad at all, and it doesn't include some possible upside adjustments you might make on Berkadia and Garcadia... which is on the books at $183 million and $120 million respectively but probably worth much more.

      Also, a lot of this valuation comes from the fact that financials are still all pretty cheap and half of LUK is basically JEF, an investment bank. So it's hard to get valuations to improve here without investment bank valuations going up too.

      But either way, if these guys create value over time (and I think they will), the stock should do well too...

  11. It would be nice to have some kind of good news on LUK as it seems the best thing one can say is that it hasn't lost too much over the past several quarters. If what we are waiting for is an increase in interest rates, then I think the stock will stay stuck at about the present level well into next year.

    I know that several of the old LUK companies are having a tough time, but I'd like to see a sizeable increase in the dividend if they can't get the stock price to move.

  12. they should start buying back their shares.

  13. I am haunted by the comment from Steinberg 2 years ago that he'd be very satisfied if LUK portfolio could just keep up with inflation. That would imply making exactly no money. I hope they are not so conservative or stuck I'm their ways as to not strive for more!

    1. I wouldn't worry about that... At the time he said that, he was expecting inflation to go up a LOT. He didn't mean that he would be happy with 2% returns. Note that the businesses they own are designed to make more than 2% return on capital regardless of inflation... and they felt that their portfolio would benefit from inflation.

      It's not like they bought inflation-linked bonds/notes or invested in gold. They invested in businesses that will eventually have much higher returns on capital than 2%.

      Right now, LUK is sort of in the incubation phase, I think. The JEF folks cleaned up some of the nonsense left over from the old LUK and are deploying capital in other areas so they are planting seeds... Eventually, they will start to show results. But until then, it might be slow, like watching grass grow.

  14. Hi kk,

    Do you have any idea where to find information on what was said during the recent Investor Day on Sept 3rd? The presentation is on the website, but notes or a transcript would be super useful. I'll let you know if I ever find anything...

    Thank you for any leads,
    Tom L

    1. Hi,

      No, I haven't seen anything like that.

    2. I called Leucadia and confirmed that there is no official recording or transcript. Any idea why they are so secretive? If they cared about shareholders, then why not offer a recording? I'm genuinely curious. Are they lazy, or trying to hide something?


  15. Any recent thoughts on LUK? Thanks

    1. Hi, sorry for the late response. No new thoughts, really. I mentioned somewhere before about how Steinberg said at the last annual meeting they hosted that if you don't think inflation is coming that you should sell LUK stock. How right he was! No inflation has come and the stock tanked.

      They are in all the wrong businesses at the moment; investment bank, high yield, hard assets/inflation, alternative assets, energy etc... Every single cylinder seems to be going down.

      But the operative word here is 'at the moment' (wait, that's not a word!). These areas are highly cyclical and some of these cycles are really long.

      So I'm not really thinking they have a secular problem but more of a deep cyclical issue that is not permanent.

      Having said that, the current LUK is very different from the old LUK. The old LUK were concentrated, distressed investors whereas the current LUK is half an investment bank.

      Anyway, I don't think anyone at LUK is any dumber now than they were five or ten years ago (including current management) so...


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