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Loews: Play it Again

February 22, 2011 | About:
Henry W. Schacht

Henry W. Schacht

13 followers
My grandfather used to tell the same stories over and over again. Don't misunderstand. They were good stories, but each repetition brought a range of emotions - sadness, love and yes, a tinge of embarrassment. A great man trying to relate and finding it increasingly difficult to do so.

All of these memories came back while listening to today's Loews (L) conference call.

This is a company with real assets - hotels, oil rigs, and pipelines. They even own an insurance company for heaven's sake! Doesn't that old guy in Omaha (what's his name again?) own an insurance company (or 2)? And Loews has CASH... lots of it... Net Cash and Securities has reached $4 billion.

Bruce "We Count Cash" Berkowitz of Fairholme fame should love Loews, but he's AWOL. He prefers Sears (SHLD), which seems to have a similar theme, but less compelling assets compared to Loews.

Does anybody care? Has management given up?

The Q&A session seems to go quicker every quarter. Long-term owners can practically recite the answers.

One lone analyst actually asked if Loews was committed to owning CNA Insurance long-term. It was almost a plea for mercy. Please, please, please. Anything, but insurance. Or perhaps it was a call to action? An attempt to unlock value. No matter. Guess the answer.

Jim Tisch even went so far as to tell the story of Diamond Offshore for the umpteenth time. Loews bought its first rigs for less than scrap value. The business was given up for dead and everyone hated it. But not Loews... they are value investors... good ones! Look at offshore drilling today. Only President Obama thinks offshore drilling is a thing of the past.

In addition to that old Diamond Offshore story, the rest of the Loews quarterly report was a repetition. Shares outstanding down. Cash and securities up. Increasing dividends to the parent company. Stay the course. Boring, but awesome.

The problem: everyone who knows (or cares) already owns L shares. After 2008-2009, one would think that investors would be clamoring for Loews-type companies. But it is met with apathy.

Maybe the Loews Value Story isn't cool in a world where Facebook is supposedly worth $50 billion. Is skepticism dead? Insurance? Assets, cash, profits? A tired concept of a dying age, right? And this, in the same week that News Corp is rumored to be parting with MySpace (ah, those were the days) for the garage sale price of $200 million?

In an apparent attempt to commiserate, another lonely questioner asked Loews managers if it was possible to have too much cash. They answer (predictably) - yes, you can, but no we don't. It's the same yarn quarter after quarter. So too are the questions about possible acquisitions. And the stock answer: No comment.

The problem is NOT a case of too much cash (or insurance), but of unrealized value. Why would Loews buy anything except its own shares? Anything under the Loews' umbrella automatically earns a (minimum) 30% haircut courtesy of Mr. Market.

If you want to see how quickly $4 billion can go missing, just look closely at Loews.

The company owns 242.4 million shares of CNA Insurance (CNA), 70.1 million shares of Diamond Offshore (DO), and 102.7 million shares of Boardwalk Pipeline (BWP). Combined value: $16.2 billion (or $39 a share).

Loews in toto has a market value of $17.8 billion (or $43 a share).

So all the non-publicly traded assets of Loews are valued at $1.6 billion (or $4 a share). A full list of the "missing" assets can be found (on the cloud) at the company website. The highlights include: Loews hotels, Highmount natural gas, and that $4 billion pile of cash and securities (net of ALL debt). Any of these assets could individually account for that $1.6 billion "stub" value. So the rest is free.

Is it Loews and its philosophy that's gotten old and out of touch? Or is Mr. Market senile?

The trouble is that Loews' discount to the sum of its parts is a constant. One gets the impression that management has given up. Their creation trades at a persistent and significant discount, while that other guy's company (Berkshire Hathaway) gets a modicum of respect. Warren Buffett (that's the guy!) even counts Berkowitz among his shareholders.

Perhaps Loews should send a Valentine to Coral Gables?

For those who own Loews, the value story never gets old. It is an investment to own and cherish. But today's conference call was bit sad and slightly embarrassing. And no, I'm not talking about James Tisch announcing his new blog!

It's time for a new approach to Mr. Market. A sledge hammer, perhaps?

How about an offer to go private?

Like Grandpa, Loews would be missed if it was gone. And I'd need to find another story to tell.

Disclosure: Long Loews.

About the author:

Henry W. Schacht
Henry W. Schacht, CFA is the founder of Schacht Value Investors, an investment management firm serving individuals and institutions. He currently serves as President and Chief Investment Officer. He earned his MBA at the University Of Chicago Graduate School of Business and a BBA in finance from the University of Notre Dame. Mr. Schacht is a member of the Association for Investment Management & Research (AIMR), the Investment Analysts Society of Chicago (IASC), and the National Association of Corporate Directors (NACD).

Rating: 5.0/5 (4 votes)

Comments

Toddius
Toddius - 3 years ago
I like L. They've actually done quite a few things to try to unlock value, including spinning off divisions. You have to wonder if there's some other, less transparent aspect to the story.
hschacht
Hschacht - 3 years ago
A less than transparent aspect? Like what? That's a pretty vague notion.

As for spin-offs, I am not aware of any... They divested Lorillard, but that was not a spin-off, but a far more complicated transaction. But I'm being technical.

And they've sold Bulova outright, but some would argue they need to get a lot more aggressive.

Buybacks have been substantial over time, but some would argue the company should be broken up.

LwC
LwC - 3 years ago
Mr. Schacht:

Thanks for the informative post about Loews. And it's entertaining too!

The thing is, when I look at the stock price chart going back about 24 years I see a pretty good market performance. In 1987 L traded at about $5 (split adjusted ) which means it's up 9X over the 24 years. That's an average of something like 38%/year. About 11 to 14 years ago or so, L was trading at around $15 before the year 2000 market crash. At $45 today that's a 3X from then, which is pretty good in my book. And with the benefit of 20/20 hindsight, I wish I had added L to my book!

It seems that the forever NAV discount hasn't really hurt the performance of the stock as far as the investor is concerned. If history repeats itself in the stock trading performance of L into the future, L investors should continue to enjoy above average investment returns.

hschacht
Hschacht - 3 years ago
LWC, I agree.

The stock has done well despite the discount. That said, as an investor in L, I want both ;-)

A rising intrinsic value + a narrowing of the discount promise a good return going forward.

But the discount is a problem. It is an indication that the holding company structure is viewed skeptically by investors. And it puts pressure on management.
AlbertaSunwapta
AlbertaSunwapta - 3 years ago
So the value must be obvious to insiders too.

What have the Tischs and other insiders done over the past couple years?
hschacht
Hschacht - 3 years ago
Yes, the value disparity is obvious to management. That's why the company has placed a sum of the parts analysis on their website. Too bad so few people have read it...
batbeer2
Batbeer2 premium member - 3 years ago
I want both ;-) A rising intrinsic value + a narrowing of the discount promise a good return going forward.d.

Why ? If IV grows at say 15% per annum and the stock trades at a perpetual 25 % discount.... seems like a pretty good investment to me.

The gap narrows and then what ? Do you currently know of something better you would buy instead ?

L is that rare stock that both Ben Graham and Phil Fisher would like.
hschacht
Hschacht - 3 years ago
Why? Because 15% PLUS an elimination of the discount is GREATER THAN 15%

And then what? Then I'll settle for the 15% or whatever the intrinsic value growth is.

So I don't have to sell, but I do have a full portfolio of similarly undervalued companies.
batbeer2
Batbeer2 premium member - 3 years ago
I guess you would not want to own something that's overpriced but grows at 15%. You would prefer something that is fairly valued no ?

By that logic, is it not better to hold something that is cheap and grows at 15% than something that is fairly valued and grows at 15% ?

10 years of 15% compounding..... the discount becomes meaningless. Emotionally, I would prefer holding it for ten years at a discount than at fair value but that's me.
hschacht
Hschacht - 3 years ago
True. Undervalued and growing at 15% is better... margin of safety and all.

And all kidding aside, there is a reason that Loews is my top holding (personally and for clients).

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