GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Analysis of Guru Companies: Ian Cumming, Leucadia National

April 03, 2014 | About:
Chris Mydlo

Chris Mydlo

29 followers

So far I covered the companies run by Warren Buffett (Berkshire Hathaway)(BRK.A) and Carl Icahn (Icahn Enterprises)(IEP). The next stock I am discussing is Leucadia National (LUK), led by the investing of Ian Cumming.

Guru

Leucadia (LUK) is led by two investing gurus, Ian Cumming and Joseph Steinberg. We follow Ian Cumming (Trades, Portfolio) at GuruFocus.com. He is the chairman of Leucadia, but he is expected to retire in June 2015. Cumming has been a chairman since 1978. He and Steinberg helped build the company. They also both graduated in the class of 1970 from Harvard Business School. In their letter to shareholders from 2006, they list their investing guidelines as:

"What We Do

We tend to be buyers of assets and companies that are troubled or out of favor and as a result are selling substantially below the values which we believe are there. From time to time, we sell parts of these operations when prices available in the market reach what we believe to be advantageous levels…”

“Rules of the Road

  1. Don’t overpay, no matter what the madding crowd is up to.
  2. Buy companies that make products and services that people need and want and provide them as cheaply as possible with consistently high quality. Lower cost and higher quality is a relentless and never-ending task.
  3. Earnings sheltered by NOLs are more valuable than earnings that are taxed!
  4. Compensate employees for performance and expect hard work and honesty in return.
  5. Don’t overpay!”

The Company

Leucadia National Corporation is known by some as a “miniature Berkshire.” It is a diversified holding company engaged through its consolidated subsidiaries in a variety of businesses, including investment banking and capital markets, beef processing, manufacturing, energy projects, asset management and real estate. On March 1, 2013 Jefferies Group Inc. converted into a limited liability company and became an indirect wholly-owned subsidiary of Leucadia pursuant to a merger agreement. Jefferies continues to operate as a full-service investment banking firm and as the holding company to its various regulated and unregulated operating subsidiaries. As far as historical stock performance, from 1978 to 2012 the book value per share has increased at an annual compounded rate of 18.2 percent and the stock has increased at an annual compounded rate of 19.3 percent.

Top 5 Holdings

Of the disclosed investments and subsidiaries, only three of them are publically traded.

Harbinger Group Inc (HRG) - 18.6 million shares valued at $230.64 million.

HomeFed Corp (HOFD) – 5.135 million shares valued at $249.05 million.

KCG Holdings (KCG) – 10.02 million shares valued at $114.43 million.

The KCG Holdings position is held at Jefferies. Jefferies helped inject capital into Knight Capital Group after a programming error created large losses for Knight in 2012. Last year Leucadia sold its holdings in Fortescue Metals (FSUMF) and Inmet Mining (IMN:TSX).

An interesting private investment to note is Berkadia. It is a commercial mortgage banking and servicing joint venture formed in 2009 with Berkshire Hathaway. Berkshire and Leucadia each contributed $217.2 million of equity capital to the joint venture and each have a 50 percent equity interest in Berkadia. The joint venture originates commercial real estate loans for Fannie Mae, Freddie Mac, Ginnie Mae and the FHA using their underwriting guidelines, and will typically sell the loan to such entities shortly after it is funded.

Conclusion

As stated above, Ian Cumming (Trades, Portfolio) will be retiring. The company started the transition during the merger with Jefferies. The CEO is now Richard Handler and the president is Brian Friedman. The recent purchase of Harbinger stock was led by Andrew Whittaker, a Vice Chairman of Jefferies. From here we have to trust that Cumming and Steinberg have been instilling their investing prowess into their successors.

Since the market bottom of 2009, Leucadia has been underperforming the other guru led stocks. They are now trading at book value. Other than Loews (L), the other guru led stocks are trading at a price-to-book of at least 1.25. I think it is being held down by its merger with Jefferies. Prior to the merger Jefferies was valued at $3.8B. That would make it about 40 percent of Leucadia. Morgan Stanley is currently trading at a price-to-book of 0.97. There were concerns with both Morgan Stanley and Jefferies during the European debt crisis in 2012. If we use a similar price-to-book for Jefferies and assign a price-to-book of 1.25 to the rest of Leucadia, we get a total price-to-book of 1.138. Currently the price-to-book value of Leucadia is at 1.00, an 87.9 percent undervalue at a minimum.

George Soros recently purchased over 4 million shares of Leucadia (LUK). You can see how the other gurus are trading the stock at gurufocus.com.

1396554592738.png


Rating: 4.4/5 (5 votes)

Voters:

Comments

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide