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Leucadia Goes Bottom Fishing Again: Buys AmeriCredit Corp and Jefferies & Company, Inc.

May 06, 2008 | About:
10qk

Well respected investment company Leucadia National has been buying large stakes of AmeriCredit Corp (ACF) and Jefferies & Company (JEF), Inc. With this article we would like to review the company and these deals.

Leucadia is often referred as mini-Berkshire; it is run by great investors Chairman Ian Cumming and President Joe Steinberg. Contrary to Warren Buffett's favorite investment strategy, Leucadia is not looking for good companies at fair prices and holding them “forever”. They concentrate on deep value investments in distressed or out of favor assets, and stay within their circle of competence which includes, among others, telecommunications, lending/banking, real-estate and mining industries. Once they control the company they turn it around and sell it for what have been historically excess returns.

Leucadia National has delivered a return on equity of above 21% per year over the past 30 years. The company’s stock has gained 33% per year in average, compared to the S&P500’s gain of 9.9% per year in the same period.

The recent crisis in the financial market has been well perceived by Ian Cumming and Joe Steinberg. This is what they wrote in their 2004 shareholder letter:

In the late 1990s there was a tremendous run-up in the value of assets. We concluded that prices were unsustainable and, therefore, sold most of our assets at significant gains. Last year it looked like values might return to more sensible levels. Competition for investment opportunities, however, roared back in the form of 35-year old hedge fund managers – private equity firms who have never known a bear market – and other investors willing to invest at high prices in risky assets with seemingly cheap money. These unguided optimists are ably assisted by the existence of an ebullient junk bond market and the hot potato bank loan market, where banks make loans sending them out the door before the ink has barely dried, disappearing into an amorphous market where credit is at best secondary and mostly forgotten. We wonder who buys these loans. All this speculation casts a familiar shadow and reminds us of 1988, and the time immediately before the demise of Drexel Burnham. But, every speculative era is different and ends in a new way. We are particularly struck by the fact that four of the twelve or so AAA companies listed on the New York Stock Exchange are all under investigation for alleged financial shenanigans (MBIA, AIG, Fannie Mae & Freddie Mac). It may be that it will take some time for the natural workings of capitalism to correct its own excesses, but the process in the end could get pretty ugly.

And “the end” finally came, a little over two years after the writing. Ian Cumming and Joe Steinberg saw it coming, and got prepared with more than $1 billion in cash. They wrote in their 2007 shareholder letter:

Smelling impending trouble in the financial markets we sold $500 million principal amount of newly authorized 71/8% Senior Notes due 2017 at par, and $500 million of 81/8% Senior Notes due 2015 at 98.307%. Leucadia also sold 5.5 million common shares at $45.50 per share realizing $242 million. We are glad to have this extra cash and are hopeful that we will put it to good use over the next year or two.

What did they buy? The first company bought was auto loan company AmeriCredit Corp (ACF). As the asset-backed securities market dries up, AmeriCredit Corp.’s stock was hit by the fear of the default of car loans and the ability of issuing new loans. This caused stock prices to decline from $25 to single digits. Leucadia bought more than 30 million shares of ACF at prices between $11 and $13; since then the stock has been up about 20%. Leucadia now owns more than 26% of AmeriCredit Corp.

What is the risk associated with their purchase? This is what Ian Cumming and Joe Steinberg wrote about it:

As of this writing, we have acquired 26% of AmeriCredit Corp. (“ACF”) for $373.9 million. We have known of this excellent company for many years, having been in the sub-prime auto business ourselves. ACF has made and financed over $53 billion of these loans and none of its lenders has lost a penny. In this environment, financing for ACF is going to be very difficult and management is taking appropriate steps to downsize the company. We are guardedly optimistic that the financial market will climb out of its bunker next year. People need auto financing to get to work.

It is worth noting that we have reported on April 9 in the Premium Feature of “Real Time Picks” that Guru Bruce Berkowitz also bought 12.9 million shares of ACF. Bruce Berkowitz runs Fairholme Fund and has achieved an annualized return of 16% over the past 9 years. Since our report the prices have ACF have gained more than 40%. (If you are not a Premium Member, please Take a Free Trial.) The purchase by Bruce Berkowitz and Leucadia should give us a lot of confidence in ACF. The company is currently traded at 80% of its book value.

Leucadia is also buying Jefferies & Company (JEF). The latest purchases were made yesterday (May 5) at prices of $19.93. Details can be seen here. If you think that you have missed the opportunities in ACF (maybe you haven’t), then you can consider JEF. Above all, JEF is traded only a fraction above what Leucadia has paid, and it is likely that they will continue to buy shares.

Apparently Leucadia has done business with Jefferies before. Ian Cumming and Joe Steinberg wrote in 2007 shareholder letter:

During 2007, Leucadia and Jefferies & Company, Inc. formed JHYH (Jefferies High Yield Holdings), a successor entity to JPOF II which returned 20% compounded annually for seven years. Our commitment to JHYH is $600 million of which $350 million has been funded. JHYH operates in every corner of the high yield market (but no sub-prime mortgages) and has thus far escaped harm, though our share of 2007 earnings was just $4.3 million. For the time being JHYH is hunkered down and has weathered the storm. Thanks to Rich Handler, Chairman and CEO of Jefferies.

Leucadia currently owns more than 42 million shares of Jefferies & Company, which is more than 30% of the company’s shares outstanding.

What should an investor do with this information? Investing in ACF or JEF, following the best in business? Or just invest in LUK and let the best investors do the heavy lifting? With LUK stocks traded at its all time high of $53.89 today (May 6), some GuruFocus users think that the stock is overvalued.

Valuating Leucadia takes a lot of hard work, that is maybe why no Wall Street analysts covers it. Currently Leucadia is traded at 2 times of its book value.

How will the credit crisis end? This is what Ian Cumming and Joe Steinberg see it:

One of us has been mumbling about Credit Armageddon for years and it seemed earlier this year that his fears were to be realized. At least for the time being, this nightmare has been avoided by strong government intervention.

Unfortunately, we suspect that the wizards of Wall Street have not only made mischief in the mortgage market, but in all other loan markets as well and that the full effect of this is not yet visible. It seems that almost all financial institutions and investors have mispriced risk, and many financial institutions have found themselves carrying assets on their balance sheets at amounts considerably higher than market or their intrinsic worth. Recently, and often at the behest of regulators, financial institutions have been forced to sell these assets or to recognize the mark to market losses, all of which erodes net worth, forcing them to raise new equity capital and/or to reduce leverage, a process that has come to be known as deleveraging.16 It may take quite a while for the scrubbing of balance sheets and the unwinding of leverage to come to an end, and we suspect that not all will survive.

We were not immune and have suffered some small damage in one of our investments. We are confident that the financial system will repair itself and to learn to better distinguish who is a worthy borrower and what is a worthy loan. On the bright side, opportunities for courageous investors should abound.

 


Rating: 3.8/5 (39 votes)

Comments

mike shearin
Mike shearin - 6 years ago
Very informative article. Up to date and I am appreciative of a small look at LUK.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago


POSTED on Feb. 14th right here.

An Investment in 'Investing' - Jeffries Group [JEF]

Posted by: stockdocx99 (IP Logged)

Date: February 14, 2008 01:18PM


Jeffries Group [NYSE:JEF] Feb. 14, 2008 [1:18 PM price]: $18.11 /share

Yield = 2.75% 52-week range: $15.06 - $33.80

Jeffries Group provides investment banking and institutional securities services worldwide. They offer securities executions, prime brokerage services and financial advisory for debt, equity and convertible securities. They also help with private equity, direct placements, IPOs and secondary offerings. Other areas include security lending and commodity related services.

2006 was a record year for the company and the first nine months of 2007 saw improved numbers year-over-year as well. A fourth quarter one-time charge resulted in a 17 cent per share loss bringing the final EPS tally for 2007 to $0.96 v. 2006's $1.41.

While 2008 is unlikely to surpass the old record, earnings are expected to rebound to about $1.30 this year - the second best total ever. Like most financial stocks, Jeffries Group shares were hard hit in the January sell-off briefly touching a low of $15.06 before settling today at $18.11 as I'm writing. JEF shares peaked at $34.80 in early 2006 and at $33.80 in May of 2007 leaving plenty of upside from here.

Jeffries Group has never had a losing year and over the years both revenues and earnings have climbed vastly higher in an irregular but clear pattern of growth. Book Value/share [a smoother measure of growth] has risen from $4.13 in 1999 to about $14.00 today. Revenues increased from $640 million to $2.3 billion over the same 8 years.

As of the latest proxy statement some fine value oriented managers owned decent sized stakes here:

BAMCO, Inc. owned 9.9%

Ron Baron's Fund Group owned 8.55% [total of 3 funds]

Earnest Partners held 7.7%

Marisco Cap. Management had 6.64%

Barclay's Global inv. owned 3.5%

FMR [Fidelity funds] held 2.96%

Vanguard Group had 2.41%

Times Square Cap. Management owned 2.36%

Mazama Cap. management held 2.16%

Neuberger Berman, LLC owned 1.64%

Frontier Cap. Management had 1.48%

Third Avenue Value Fund held 0.71%

There were two insider buys in November 2007 at $22.96 - $23.28/share.

Over the past five years JEF has traded at average P/E of 17.2X - 20X. These shares reached peak price/book value levels of between 2X and 2.6X during each year since 2001. With book value now $14 and rising a $28 target price seems reachable once the market mood improves.

An 18 multple on the partial earnings rebound expectewd this year leads to a $23.40 goal price on that basis. Even that would be a 28.7% gain from the current quote and the target based on price/bv would lead to a 54% gain.

Jeffries Group's current yield of 2.75% is almost equal to what is paid on CDs today. JEF has paid a cash dividend since 1999 and they have raised the dividend each of the past five years. The payout ratio is well covered so I see little chance for a cut.

Risk? Like any stock market related company Jeffries Groups fortunes are tied to the overall level of trading activity as well as investor sentiment. A prolonged bear market could make it hard to achieve the predicted earnings.

Conclusion: With these shares having already dropped from $33.80 to $18.11 over the past eleven months I think most of the risk has been priced in. A return to normalized valuation based on earnings or price/book value could see these shares recover to $23.40 - $28 for very nice gains on top of a decent yield while you wait.

My targets might well turn out to be too conservative since Jeffries Group shares actually hit $33+ in both 2006 & 2007.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Insider Trades on JEF:



CUMMING IAN M Director

2008-05-05 Bought 2,153,092 @ $19.91

STEINBERG JOSEPH S Director

2008-05-05 Bought 2,153,092 @ $19.91

LEUCADIA NATIONAL CORP 10% Owner

2008-05-05 Bought 2,153,092 @ $19.91

CUMMING IAN M Director

2008-04-30 Bought 3,875,571 @ $18.81

LEUCADIA NATIONAL CORP 10% Owner

2008-04-30 Bought 3,875,571 @ $18.81



STEINBERG JOSEPH S Director

2008-04-30 Bought 3,875,571 @ $18.81

MACCHIAROLA FRANK J Director

2008-04-28 Sold 7,471 @ $18.97

LEUCADIA NATIONAL CORP 10% Owner

2008-04-25 Bought 5,472,423 @ $16.64

STEINBERG JOSEPH S Director

2008-04-25 Bought 5,472,423 @ $16.64



CUMMING IAN M Director

2008-04-25 Bought 5,472,423 @ $16.64

robinsonfunds
Robinsonfunds - 6 years ago
Excellent write up of recent LUK moves. As the article notes, these guys are GREAT investors in distressed situations.

These are 2 companies to put on your watch list. I look for JEF to miss earnings estimates for Q2, hopefully the market will overreact, thus making for a good entry point.
76684
76684 - 6 years ago
Good article!

only one mistake: {and it is likely that they will continue to buy shares.}

See its news:

Leucadia National is selling 10 million shares to Jefferies. In return, Leucadia is buying 26.6 million Jefferies shares and receiving $100 million. The Jefferies shares are worth $398.2 million. Jefferies will sell its stake in Leucadia, while Leucadia agreed to not sell any of its position in Jefferies for at least two years and not acquire more than a 30% stake in the investment bank.

http://online.wsj.com/article/SB120878041247630949.html?mod=googlenews_wsj

Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
One more Insider Buy on Jeffries Group [NYSE:JEF]

since the last posting:

Director Ian Cummings bought an additional 1,603,382 shares on May 8, 2008 for $19.31/share average and $30,945,272.
Ranni
Ranni - 6 years ago
I just wonder, do you see Leucadia´s JEF stake, more "beneficial"* for both. In my view, Jef´s valuation looks too expensive to be typical investment.

I just mean, as i know, Jefferies have maybe one of the best analyst team, what comes to Mining. That could be one reason for steak?

vgm
Vgm - 6 years ago
After the recent rise to around $15, AmeriCredit (ACF) now back under $10. Leucadia bought at $11-13.

Looks like a significant opportunity to piggy-back Cumming and Steinberg.
Ranni
Ranni - 6 years ago
I also trust LUK´s guys at long therm, but you should notice, there is heavy c-level insider selling at same time. These are so huge amounts, i rather sit and wait, before start buying.


05/27/08 BERCE DANIEL E Sold 106,000 $13.11 1.39 Mil

05/27/08 BOWMAN STEVEN P Sold 10,000 $13.04 130,400.00

05/22/08 BERCE DANIEL E Sold 100,000 $13.13 1.31 Mil

05/21/08 BERCE DANIEL E Sold 50,000 $13.45 672,500.00

05/12/08 MORRIS CLIFTON H JR* Sold 256,000 $14.48 3.71 Mil

05/12/08 FLOYD STEVEN MARK Sold 50,000 $14.42 720,750.00

05/12/08 MORRIS CLIFTON H JR Sold 256,000 $14.48 3.71 Mil


Also ACF:s leverage is much higher this time, as it was last recession.

just my 2 cents.. .
Ranni
Ranni - 6 years ago
New Crisis Threatens Healthy Banks. “Increasing struggles by consumers and businesses to make payments on a variety of loans, not just mortgages, are setting off a new wave of trouble in the financial sector that is battering even institutions that had steered clear of the subprime-home-loan debacle. Late payments on home-equity loans are at a record high, according to fresh data from the Federal Deposit Insurance Corp. The delinquency rates on loans for cars, small businesses and construction are spiking to levels not seen in a decade or more. Unlike last year, when soaring mortgage defaults sparked a crisis of confidence in the financial system, the root of these problems is the downturn in the broader economy.”

(Washington Post, June 22nd)

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