Friday, February 13, 2015

Loews 4Q 2014 Conference Call

I don't normally make posts about conference calls as I tend to look at things over the long term and things don't change much from quarter to quarter or even year to year.  If I look at something and like it, it is probably because I looked at how someone has done over a long period of time.  Short term results won't generally change my opinion about a company or management.  But there were some interesting comments so I thought I'd make a post.  This is by no means a summary or anything like that at all.  They talk about a lot of things I don't mention here so go check it out if you're interested (like Loews Hotels).

Berkshire Hathaway (BRK) Disclosure
And by the way, the other day, there was an article about how BRK has bad disclosure.   Buffett said that they disclose what he would want to know if the position were reversed.  It's true that there isn't a whole lot of detail about BRK's operations.  But it's also true that they have over 70 businesses and it isn't practical to disclose details about every business.

The reason analysts say disclosure is poor at BRK is because analysts are paid to estimate earnings on a quarter to quarter basis.  In order to do that, of course you need more detail.  You would want guidance too, right?  But then again, Buffett doesn't want investors that care about quarterly earnings so he doesn't feel the need to cater to them.

You can't really blame the analysts; this is the way the industry works.  Clients want accurate quarterly earnings forecasts.  Analysts are evaluated partly on how accurate their estimates are. Analysts are also evaluated on how a bank's clients feel about them (usually, clients want accurate quarterly earnings predictions!).

And Buffett wants no part of it.  There's nothing wrong with that.  He provides enough information for long term investors to make a decision about owning BRK.  I do suspect, though, that in the post-Buffett era, there would be more disclosure.

Anyway, I am making this post about the recent L conference call because of what's happening in the oil market and James Tisch also said something interesting about the insurance market.   L is heavily weighted in energy as one of their large positions is Diamond Offshore (DO).

Loews (L)
But first, some L stuff.  L bought back 4% of their shares, spending $620 million.  They also bought 1.9 million shares of DO in the fourth quarter.  They just thought it was cheap.

L had $5 billion of cash and investments as they want to maintain a strong and liquid balance sheet to take advantage of opportunities.   Of this cash and investments, $250-300 million were in equities, $900 million in limited partnerships (12-13 hedge funds) and the rest in fixed income and money market funds.

Trouble is Opportunity
Tisch said on an earlier call that for DO, trouble is opportunity.  He said now that, "The trouble is certainly here, and Diamond is prepared for the opportunity".   Due to the potential opportunity, DO won't be paying a special dividend.  He reminded us that nine years ago during the boom, DO was paying out big dividends (while others rushed to order big rigs).  Since 2006, DO has paid $41/share in regular and special dividends returning more than $5.7 billion to shareholders.  DO has the strongest balance sheet in the industry.

Tisch also said he doesn't believe that $40-60/barrel is a steady-state price for crude.  He feels $70-90 is more like it.  (The crude forward curve does show crude oil over $70/barrel further out)

One interesting comment he made was that global crude oil production now is 95 million barrels per day (b/d) and demand increases by around 1 million b/d every year.  But in order for production capacity to keep up with increasing demand, the industry has to find 6 million b/d of production, not just 1 million b/d for the new demand.  That's because if there is no exploration to replace depletion, after one year, production capacity will go from 95 million b/d to 90 million b/d.  So the industry has to find 5 million b/d just to replace depletion, and then another 1 million b/d for incremental demand.

Tisch said it was the right decision to cut dividends last year at Boardwalk as they have $1.5 billion in organic projects to be built over the next three to four years that is expected to generate double-digit unlevered returns for years to come.

Commercial P&C
CNA is doing really well and they are really focused on getting their combined ratios down.  They really want to become a top quartile underwriter.

He also made an interesting comment on commercial P&C pricing.  He said he feels good about pricing in the commercial P&C space due to the "extraordinary capital discipline" that has been in place for the last five to ten years.  The industry generates a lot of excess capital, but that capital has been returned to investors via share repurchases and dividends.  In the old days, the cycles were deeper because companies retained their capital.   Now, he doesn't see the capacity pressure that drove down prices in past cycles.

This has led to price increases of 2-4%, which covers 1.5% or so inflation.

Investment Opportunities
Asked about investment opportunities, he said the only obvious area is energy.  He feels L has enough energy exposure via DO and Boardwalk.   Nothing else really stands out.  He says this is due to the long end of the yield curve being squeezed by the Fed's $4 trillion balance sheet; rates are at unnaturally low levels that push up asset prices.  As for seeking investments in E&P, he said "been there, done that".  L's exposure in energy will come from DO and that's enough.  (Boardwalk too to some extent, but that's not really sensitive to commodity prices).

On Markel's (MKL) conference call, Tom Gaynor mentioned that the crude oil price going down by half in such a short period of time proves that "nobody knows anything about anything".  That was very interesting.  He started the MKL call talking about all the things that people were worried about at the beginning of 2014 (low interest rates, overvalued stock market, too much competition in insurance, geo-political risk), and yet they grew BPS 14%.

And this reminds me, again, of what is really important;  Not so much the predicting of events, but having a structure that can deal with the various potential outcomes.

Buffett said during the financial crisis that it doesn't matter what happens in the industry, it's the low cost provider that is going to come out stronger on the other side.  He said this is true with banks (cost of deposits), commodity producers and everything else.   A bad environment will impact all the players, but it's the low cost providers that will take all the business as the higher cost providers fail.  Back then he was talking about Wells Fargo and the banking industry.

This is why Buffett goes for the best in class businesses so he doesn't have to weave in and out of the businesses according to what's happening; he'll let the management of the business manage accordingly.

In L's case, they can't predict crude oil prices over the near term, but they believe that crude is worth at least $70/barrel on a sustainable basis, and in that environment rigs would have work to do.  They have been in the drilling business for 25 years so understand it's a cyclical business (with some long, deep cycles).   L plans to have DO grow over the next few years as opportunities arise.  Tisch points out that DO has the strongest balance sheet in the industry (so is ready to take advantage of opportunities).

By the Way About Predictions
Oh yeah, and all of this talk about predictions reminds me of what I always talk about here about the futility of predictions.  Whenever I talk about this sort of thing, about not worrying about Greece, Ukraine, U.S. government default and whatnot, I often get pushback; how can you not worry about it?  Isn't that reckless?

A lot of people said that mistakes were made because people ignored the risks before the financial crisis etc.

Well, I don't think ignoring these 'distractions' is reckless at all.  In fact, most of the things that people were worried about over the past few years turned out to be nothing.

What is reckless, though, is to invest in a business that might go under if, for example, Greece is kicked out of the Euro.  It would be utterly reckless to invest in a business that would go bankrupt if peace is not achieved in Ukraine within the year or something like that.

It is not reckless to invest in a great business that will be fine over the next few years regardless of what happens to Greece or Ukraine.  In fact, I think it would be reckless to sell a great business just because the price of it might go down if Greece exits the Euro just to try to get back in later at a lower price.  That would be reckless.

Some say, how can you ignore emerging market exposure of this or that business?  Well, you don't really ignore it; you assume that the business will do well over time through cycles.  Nobody can predict with any accuracy what is going to happen anyway.  This is going to be my motto from now, what Tom Gaynor said; "Nobody knows anything about anything".

So you don't ignore it in the sense that you deny it's ever going to happen.  It's more like you ignore it acknowledging that yes, these scary things probably will happen but nobody knows exactly how things will unfold, so you just stick to businesses that won't get killed when it does happen.

Not too long ago, people were worried about the dollar.  The Fed was going to print the dollar into oblivion.  Do anything to get out of U.S. dollar assets.  Buy gold.  Buy hard assets.  Buy emerging market stocks. That was the popular view.  Look what's happening now.  Also, a few years ago, no matter which annual report you read, they all talked about emerging markets, growth markets, BRICs etc.  It seemed like every company report you read devoted a large section to how much they are investing in "growth" markets since the U.S. economy was not going to provide much growth.  People have been calling for higher rates, for inflation and all sorts of other things for years.

This is not to say these things won't happen.  It's just that nobody can know when and what is going to happen.  So you just have to invest without leaning on any one scenario too much.  I know portfolios are often "tilted" this way and that, but I bet more often than not, they tilt the wrong way.

So yes, ignore the noise, but it's not at all reckless to invest in solid businesses that will do well over time and through the cycle.  That's the key.

The difference between someone like Buffett, and most others who worry about all the headline stuff is simply time horizon.  Buffett is looking out five, ten, twenty years.  So what people are predicting over the next few months or year or two is not relevant at all.

Anyway, L hasn't been doing too well recently.  A lot of that, of course, has to do with the wild swings in the drilling industry.  I agree that this is a deeply cyclical industry and who knows when it will turn.  But if you believe that crude oil will play an important role in the global economy for years to come, then the current decline in DO is not a permanent impairment but only a temporary one.

I do think that L is overly conservative, but that's the way they are (and perhaps that's why they have survived for so many decades!).   Sometimes I wish they would do something; Buffett with $240 billion in equity has found things to do in the past few years, you would think L with $20 billion in equity (1/10 the size) would be able to find more things to do.  Well, at least they are buying back their stock, and yes, they have invested a lot in their subsidiaries.

I wonder if some people who came up in the 1980's and 1990's are anchored to valuation levels of the past.   This is not to say that people should pay bubble prices, of course.  Frankly, I don't see a lot of bubble prices in individual stocks (other than some hot restaurant stocks, social media/tech stocks etc.).

The genius of Buffett is that although he grew up paying 2x P/E for non-distressed, "nothing wrong with them" stocks in the 1950's, he can still go out and make the largest acquisition paying 20x P/E (and making value investors around the world roll their eyes at how bad the deal is) without blinking.  Well, we don't actually know if he blinked.  

Anyway, I look forward to the annual report(s).


  1. This is great work. You should share this stuff on StockTwits. Lots of smart people who might be able to help you identify further info you may have missed, or at least re-share amongst their followers -- further amplifying your reach and fostering discussion.

    1. Thanks, but I'm happy here in the quiet corner of the internet. I don't really look for amplifying my reach or anything like that.

  2. morning, as always thanks for sharing your work ! was buffett buying 11 billion ibm really better than doing, nothing ? has buffett ever made the case for buying ibm over brkb in 2011 ? Did buffett take a tax loss on his highest cost ibm in q-4 ? we'll know soon enough !

    1. Hi,

      You can always find things someone could've done better. Maybe Buffett would've been better off doing something else, but he is in it for the long haul so it's still way too early to say. I bet if you go back and look at his big investments (going back to the 1950's), things didn't just go straight up right after he bought them. Washington Post went down another 50% after Buffett bought it in the 70's, for example. So I wouldn't jump to any conlcusions based on the first couple of years of a really long term investment.

      Also, he has been doing other things too since the crisis, not just IBM. He got two new investment managers too, for example, who have done really well. He made some large acquisitions etc.

      I wouldn't obsess over a single investment like IBM.

    2. no one disputes the fact that buffett had a huge edge in the 50s, he has told us to judge him over 5-6 year periods vs spy. he bought the ibm, story, and that story has now broken down. brkb is still my largest holding but buying and promoting ibm in the annual letter was out of his wheel house and a huge mistake. I expect him to admit that in this years letter and to take full responsibility for the error and to disclose gates never blessed that trade or discussed it with buffett. btw, you have the research skills to do the work, how have buffetts public company picks the past 5-6 years done vs spy or brkb ? buffett buys not todd or
      ted ? Thanks, hc.

    3. Hi,

      It could be a mistake. He admitted COP was a mistake and he's made others. It's not a big deal, really. People freak out when Buffett makes a mistake because people think he's perfect. He's not. If you open the Wall Street Journal on any given day, you'll see many more CEO's making much bigger (relative to the value of their firm) mistakes; mistakes that literally destroy their companies. Buffett's mistakes, however, barely put a dent in BRK's balance sheet. So it's hard to understand what the fuss is all about.

      As for the equity portfolio, I don't know. I don't track it that way, but there are Buffett followers all over the net that follow/track this stuff so you can probably find it somewhere.

      In evaluating Buffett, though, you have to look at the whole and not just the equity portfolio.

      Back in 1995, BRK had $21 billion in equities versus shareholders equity of $17 billion. So any owner of BRK owned a leveraged stock fund, at 1.2x. Underwriting profits and operating company profits (See's, Nebraska etc) were free on top of that. So the equity portfolio was a big contributor to BRK's BPS growth. (It's important to remember that even then, the leverage came from deferred taxes and not really the insurance float. The insurance float even back then was invested in cash and bonds; the sum of cash and bonds was equal to or greater than loss and LAE on the balance sheet).

      As of September 2014, however, the equity portfolio was $120 billion against shareholders equity of $240 billion. So it's a 50% weight in terms of net worth.

      The other side, of course, is the ever-increasing operating companies. BNI, for example.

      So you have to look at the whole.

      Anyway, it's an interesting discussion.

  3. kk, as you know buffett bet hot shot hedge fund guys they couldn't beat low cost spy over time. he is winning that bet by a mile. IF buffett agrees costs, expenses, and fees matter, why buy high cost ibm in 2011 over the lowest cost public company, brkb ? I've owned brkb 14 years , team brk has taken ZERO equity , not one share of equity from me in 14 years via option grants. in that period how much has team ibm taken via option grants and over compensation, 20 % or more ? how about KO, more than 20 % of the equity ? unless buffett makes huge mistakes buying brk over almost any other public company is the low cost way to invest. For 4 years I've been asking buffett to make the case WHY is high cost ibm a better 20 year bet over low cost brkb ? I'm still waiting ? btw, don't forget buffett didn't just buy ibm he aggressively promoted ibm in the annual letter as well, a huge mistake. never promote what you cant control, never, his good house keeping seal of approval is too valuable to give away ! also,the 11-12 BILLION net buy of ibm is serious money, the opportunity cost of buying ibm over brkb or spy is 15 billion and counting, serious money, and a huge error.

    1. Well, I don't know what else to say. Maybe it was a mistake. People make mistakes. As long as they make smaller mistakes than others, I am still on board. But my feeling is still that it's still very early in the game. This guy holds positions for years, so I can't say if IBM is a mistake or not. It sure looks like one now, but that doesn't mean it's done. The show is not over yet.

      And the other point I would make is that I have a theory. Of all the great investors and traders over time, I bet that MOST people would have not agreed with what that great investor was doing at the time. If someone was sitting in the office along with these legends in real time, I bet they would have been freaked out MOST of the time and not agreeing to what is going on.

      Just look at what people said about the BNI acquisition. I bet people would have looked at Coke and said, why is this value investor paying a growth stock price? etc. When Soros made a bet against the Bank of England, many would think, why fight a central bank?

      I guess Buffett's investments, for the most part, make a lot more sense, usually, so you won't have as much of that. But I don't know what many Buffett fans would have said if they were sitting next to him while he piled into AXP during the salad oil scandal. I bet a lot of us would have been scared to death of putting so much into one trade, and into a stock involved in a scandal like that.

      I've worked with some people like that, and oftentimes, we are like, wtf? And you know what? Those are the trades that often turn into home runs. It's when you do something and everyone thinks you're an idiot that you know the investment is going to work out and has grandslam potential.

      When you do something and everyone nods along and says, yeah, that's the way to do it. I did it too. That's when you know you are about to get killed.

      So in that sense, we can monday-morning quarterback all we want, but it doesn't matter.

      Maybe IBM is a mistake. Maybe not. I don't know enough at this point to make that determination. And I don't think Buffett suddenly turned stupid either. We'll see how it goes. And if it turns out to be a mistake, he'll deal with it. Tesco was a mistake too.

    2. You could argue has IBM been a mistake? Does it matter much if IBM share price hasn't shot straight up as long as BRK is getting benefit from IBM's dividend and buybacks? If the dividend was threatened, sure, that would clearly be a HUGE mistake, - but seems like business as usual for now.

      Though why Buffett doesn't buyback BRK shares aggressively is another separate question.

  4. when buffett bought ibm, the, we will earn 20 $$ a share in 2015, story, was in full force, he bought the, story. since then, ibm has missed and guided lower 16 straight quarters, the story, and the facts, have changed. now ginny is talking, 16ish a share in 2015 and it took until q-4 2014 to figure out 20 $$ in 2015 wasn't real ? PLUS, ibm recently disclosed that ginny and friends have been given raises, WHY< because they didn't miss by more ?? if buffett isn't disgusted by ibm and its BODs, its a good thing he's a young fella, maybe in his lifetime they will justify the raises in 2015, but I doubt it !! imo, its 51-49 % buffett took the tax loss on his highest cost ibm, IF he has, lets see how ibm trades into that news ?? I hope you live out west or south , if not, stay safe bud ! hc.

  5. we got it hclas, Buffett in all likelihood made a mistake, time will tell ultimately of course. And who doesn't talk their book in letters or in the media? Would you rather invest with someone who doesn't talk their book?

    Good post BI, I know not as valuation and single-company intensive as what you normally do, but I like more of these periodically to hear what the big money is thinking. My day job is in finance but work type and geography prevent me from listening in.

  6. Great article KK. Especially the piece about predictions. Focusing on buying a piece of good business at attractive price instead of unproductive business of fretting about macro economic and political events can never be emphasised enough.

  7. I've got to disagree with the "By Way Of Predictions" segment. Or I would reframe it as a useful heuristic, as opposed to an investment strategy. Your points are also consistent with a world where macro effects are ALWAYS important to individual portfolios, but we live in a nation with relatively decent fundamentals and relatively competent monetary policy. The S&P might be at a different level if the Fed shared the views of the ECB, and tightened policy in 2011. In fact, if you go back to Fed minutes from the summer of 2008, they discussed tightening policy in response to headline inflation driven by oil prices. And subsequent meetings showed a shrinking, but existent, faction who kept pushing for tighter policy in response to prospective inflation.

    The "focus on your portfolio" works when you have a Paul Volcker, and when Richard Fisher is not the Fed chairman. But it should still be treated as a rule of thumb that must be regularly checked for relevance.

  8. ++ we got it hclas, Buffett in all likelihood made a mistake, time will tell ultimately of course. And who doesn't talk their book in letters or in the media? Would you rather invest with someone who doesn't talk their book?++

    morning joe, that's the point buffett SHOULD be talking his book ,HIS book is 99 % brk. buying brk, promoting brk, making the case for brk in the annual letters, is what he should be doing. buffett hasn't taken one share of equity from his partners in 50 years THATS the difference in the long term performance of brkb, i'm shocked its taking so long for the financial press to, get it. Forget the , greatest capital allocator of all time, buffett has been the most generous CEO of all time, the lowest paid ceo of all time, the most unselfish ceo of all time, THATS the buffett - brk story no one seems to get and why brkb is 150 today ?? Fewer shares outstanding because there have been no options issued is huge long term, huge. just ask msft , ibm, ko, etc , partners. have a grand day.

  9. Thanks for your blog. I really enjoy reading your thoughts on companies like L, BRK, and many others. It's a refreshing perspective that certainly isn't common in most media commentary.

  10. Thanks for the note and commentary. Disclosure: I'm long BRK and MKL. I used to be long L, but increasingly found that the quality of their assets is much lower, so I parted ways... We all know that BRK evolved from cigarette butt investing to franchise investing. I don't think L has done so, nor will they...I also don't have a high degree of confidence in their insurance operatsion, whereas BRK is the gold standard, MKL is, in my opinion, 2nd best.

  11. The issue with Loews is that they have invested poorly for a long time and the current businesses they are in are not that good. For instance, total NAV has declined from roughly $23b in 2006 to $19b today, and NAV/share is up from $43/share to $51/share over that period due to repurchases at a discount to NAV. That's a 2% CAGR in NAV/share over an 8 year period.

    They seem to get excited about the dividends paid from something like DO, but after you factor in time, the returns are very low. DO stock price was $40/share in 2000. The company has paid $41/share in dividends since then, almost all coming after 2006, and the stock price is currently $34/share. That's a 6% IRR. Plus, I fail to see why that business should earn high returns over time, as they are basically buying and selling a commodity with little added value. And that's the successful one, not the multi-billion dollar Highmount debacle or the lousy insurance company that comprises over half the company's value and has earned low single digit ROE's for over 15 years.

    I can understand why the company wanted to get out of the tobacco business, but the Lorillard sale looks horrific in hindsight. They got about $8.5b in total for their sale of Lorillard over the 2001-2007 period, with the last 38% swapped for 32% of Loews stock at $50/share in 2007. Since then, Lorillard has tripled in value and Loews has traded down. Consider that Lorillard now has a $26b EV and has produced over $8b in FCF since 2007 vs. the current market cap of $16b for Loews.

    I don't have the financial history back far enough to do the math, but I wonder how much of Loews historical success was due to its $400m acquisition of Lorillard in 1968. I give them credit for that, but now that's gone.

    Another thing worth noting: in the 2012 annual report, they started showing the historical of comparison of Loews to the S&P 500 on "share price return", not "total return", which knocks off about 400 basis points of return for the S&P due to dividends, which historically Loews has not paid at a significant level. That's sleazy at best.

    The irony here is that a young Larry Tisch would probably look at this company and see a juicy activist target. I have current NAV at $52/share. There is $9+/share in net cash & investments. Stock price is $42/share. CNA stake is worth $27 per share of Loews. If you spin that off and back out cash, you are buying $15/share of assets for $5/share. Plus you've got $21m in annual savings by disbanding the 3 headed "Office of the President".

    1. Thanks for the thoughtful comment. I agree with a lot of it (or most of it). As for the comparison with the S&P, they used to exclude dividends. And then they included dividends in 2010 or whenever it was. I wrote about how they fudged with their long term return comps in an old post here:

      When the 25 year comparison started to thin out, they changed it to 50 years, which of course made the margin of outperformance a lot higher. But yes, I agree that excluding dividends is unfair to the S&P which pays out a lot versus L which pays out very little (and repurchases shares).

      And yes, CNA has been a piece of crap for years with many turnaround attempts. I wrote about that too. It looks like things might be turning now, but we've seen that before too. This is why even though I still like L, it's never been a big position for me. And great point about Lorillard.

      Also, yes, DO can pay out dividends but so what. You can buy a stock for $10, get paid $10 in dividends the following year and get all of your money out, but if that $10 stock does nothing or goes down over 10 years, you're return is going to still look horrible even though you "got all your cash out". So just because you got your cash back doesn't mean you can just leave it in your portfolio and let it be a drag forever.

      Having said that, I don't know if it's a great idea to be evaluating DO and L now in what is clearly a hard down-cycle. DO looked pretty good even in 2012 (and not the boom peak of 2006/2007) with decent IRR (I think 12%+, and 30%+ return on invested capital or something).

      I would never really evaluate a value investor, for example, in the midst of a bear market. I wouldnt evaluate them at a peak in a stock market bubble either.

      And yes, you can do all that math and say your are buying $15/share in assets at $5/share which sounds dramatic, but it still just a $10 discount on a $50 stock. To realize a triple or anything close to that would require all of this stuff actually happening, or being able to structure at trade synthetically to realize that (long L, short CNA etc... but then you still have a lot of basis risk there; I still remember the RJR/Reynolds stub trade, or how about the Palm stub trade?

      Anyway, this is an interesting situation and you make a lot of good points that I actually do agree with.

      Thanks for dropping by.

  12. I think there is little excuse for excluded dividends from the return comparisons.

    On picking endpoints, I am sympathetic to your point of view in general. I looked at Washington Post (now Graham Holdings) in late 2012 and was marveling that it hadn't really gone anywhere since 1987, which is a long period of time, and of course the stock has tripled in the two years since. On Loews, though, the point holds that NAV has been basically flat since 2006. It's not like it was doing extremely well and is now way off and I am marking it at some low point. The all-time high for NAV/share in 2013 was $55. DO and BWP have come off recently, but CNA has done well. This gets to the larger point that it's just an unimpressive group of assets. Since 2006, CNA is flat, DO is off by over 50%, BWP is off by over 40%, and those returns are largely justified by operating results.

    On the stub math, I am not advocating that any individual investor who invested today would see high returns from a split-up; that is clearly not going to happen with the Tisch's in charge. I am advocating that an Enormous Activist might actually make a run at Loews and try and break up the company. For $3b, you buy 20% of the company and demand change. If your investor base is not tax sensitive, there is a clear path here to value realization with little downside. The Tischs don't actually own that much stock, though it's hard to tell from the filings because holdings have been split up, but I would guess they maybe own 15% of the company. In addition, I think the current corporate structure may actually be somewhat tax inefficent as because Loews owns less than 80% of DO and BWP, they are paying 20% dividend taxes on those holdings, which would not be the case if they were spun-off. I am not sure on that, though.

    While I am generally somewhat skeptical of activists, I think that activism here would be beneficial. It's not like the Tischs have some birthright to this company and they pay themselves very well for what has been mediocre performance for a fairly long period, and it doesn't appear like they have some new blueprint. Holding their feet to the fire would be useful.

    1. Good points. I don't disagree, actually. As for mediocre assets, though, that is sort of the intent. They sort of lean more towards Leucadia than BRK in that sense. LUK (or the old one, at least) were distressed investors and would only buy problem assets. They wouldn't buy KO even if they thought it was reasonably priced. And LUK critics used to talk about how LUK was a portfolio of crappy assets, which was kind of wierd because that was the whole purpose. Steinberg himself said that he would never buy the stuff LUK buys for his own personal portfolio.

      So in that sense, I wouldn't really expect L to hold a portfolio of outstanding assets like BRK.

      Anyway, a little bit of activism would surely be interesting. But the Tisch family is sort of like royalty in NYC (and the financial industry) so it probably won't happen (you would burn too many bridges for a very small amount of money).

      Having said that, I do often wonder if they should get out of their comfort zone a bit more.

      Anyway, thanks for the interesting discussion.

  13. Buying mediocre assets at low prices can work out great, as LUK has ably demonstrated, but that is only if you sell the assets. LUK almost always sold the assets at some point. For instance, they were in and out of Fortescue in 6 years and made $2.3 billion. You can't buy-and-hold your way to great returns if the returns on the core businesses are poor. As we discussed earlier, how much of Loews long-time excess returns were due to holding a classic great business (Lorillard) over a long period of time? Probably the vast majority, and that business is no longer in the portfolio.

    Part of the appeal of the activism case here (and why it exists) is that instinctually it doesn't seem like an obvious idea because of the Tisch legacy, but when you actually look at the setup and the recent history, it makes a certain amount of sense. I stated looking at Loews a few weeks back when the stock was down and I was very surprised at how poorly they have done since they got rid of Lorillard and how poor the current investments have done over a long period (as you have pointed out in your posts), especially CNA. And then you see that the Tischs pay themselves well, don't own supervoting shares, don't hold anywhere close to a blocking position in the stock, and you realize that holding these assets together doesn't even make that much sense. This is unlike in Berkshire where you can argue that the whole is greater than the sum of the parts due to the cross-support the operating businesses and the insurance companies and the demonstrated ability to make smart acquisitions.

    I agree that the Tischs are tremendously powerful politically in New York and that would dissuade many would be activists. I think maybe they have gotten a bit fat and happy and I would greatly enjoy the irony of a young Larry Tisch-like character going after them.

    1. Good point about selling. LUK did sell often. I guess it would work for L if they could take the mediocre asset and make it great and then hold on. That sort of hasn't happened.

  14. In regards to IBM, does it pique anyone else's curiosity that ESL just disclosed a new stake in IBM this quarter? Or does the current story at Sears (which will most likely not look the same once Eddie is done liquidating its assets) make everyone a little hesitant? I am just curious to hear everyone else's thoughts. Thank you.

  15. Has Tisch ever done any type of mea culpa yet on his failures as a capital allocator? if he has I haven't heard it. He seems overly focused on the macro economy when talking about potential investments on calls.

    For example here is Jim Tisch from Feb 2012 earnings call...I dont know how he doesnt get called out for these type of comments given his job. Saying the future is not clear so I cant put money to work is probably the number one sign someone shouldnt be actively managing money/assets.

    "Yes. I think, and I felt this way for a few years now, that the acquisitions in this environment are very difficult for a few reasons. Number one, because the future is really not clear. I don't have a clear view of whether the economy is going to grow at 2%, 4% or 0%. And there still are an enormous number of uncertainties that those of us that manage businesses have to deal with day in and day out. That's number one. And number two, there really aren't a lot of property or assets that are for sale at prices that I think would be attractive for Loews shareholders."

    1. No, I don't think so. I agree he tends to be overly conservative and I totally agree with the macro comments. As Buffett keeps saying, the future is never clear. If you wait for clarity, then you will end up paying a higher price. I love how Buffett sees all sorts of problems (his views are not that different from the bears; inflation is inevitable, there is too much debt, QE-infinity will not end well etc...) and yet finds things to do. Again, it's because he has such a long term view of the world so his macro views don't even matter.

      Anyway, I look forward to the annual report.

    2. Oops, I meant to say I agree with your comments about the macro comments.

  16. The main reason Loews has performed so poorly in recent years is HighMount. Loews paid $4 billion for it in 2007 and it was pretty much a total wipeout. After years of write downs which prevented book value from growing, it was sold for a pittance late last year. Excluding the HM deal, the negativity surrounding Loews wouldn't be nearly as much as it is currently. Of course, the Tisches are responsible for that deal as well as the other questionable things already mentioned such as the share exchange for LO and the failure to take advantages of opportunities during the financial crisis. It is interesting if you go back and look at the 13-F filings in recent years and look at the securities portfolio excluding DO, CNA, and BWP, Loews had significant exposure to gold and precious metal mining equities...obviously not something normally associated with value investors. In spite of all the negatives, I own the stock. I think what the T.Rowe Price guy who recommended Loews at the Barron's Roundtable said last month made sense...Loews is cheap and pretty much every decision it have made recently hasn't worked out. So, if you believe in the principal of mean reversion and that the Tisches haven't completely lost it, then Loews is due for a break. Given how both DO and BWP have collapsed and HM was a compete wipeout, seems like things can't get much worse. At least with HM now gone, book value should start growing again.

    On a related note, I think there really might be something in BWP. The stock crashed after the div was cut but I don't think the business is permanently impaired. Its trading at a double digit free cash flow yield and you know that Loews will provide any support necessary to get the company turned around. The main issue was that BWP's main pipeline was taking gas from the gulf coast to the northeast, but with the production explosion from the Marcellus and Utica shale, the northeast now has more gas than it needs. They are working on reversing the pipeline flow and should eventually get this corrected. In the meantime, BWP is investing in other opportunities. The div will eventually be raised and when that happens, the price will rise substantially. However, it may take a while. Great blog. Thanks for sharing.

    1. Hi,

      Thanks for the comment. Good point about Highmount. I never liked these energy investments. LUK had some too and I didn't like those. It seemed like everyone was rushing into energy investments (when everyone rushes in, no matter how smart they are, it doesn't feel good).

      Anyway, things are more interesting looking now, though, for sure.

  17. It seems like at the end of 2nd quarter there is probably 369 million shares. And then if you consider around 3.7Billion of net cash at the parent company, you got 10 bucks in cash. Currently company is selling for 14.3 B of market cap. After taking out around 9 billion of CNA stub, it seems like current price is a good buy despite the major headwind in energy side.

    I just doubled my position though I expect hardly 8-9% returns here on annually for next 3-5 years given the mediocre management of cash and business in general.


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