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Ian Cumming Top holdings: Jefferies Group Inc., AmeriCredit Corp., International Assets Holding Corp., Capital Southwest Corp., TravelCenters of America LLC

September 13, 2009 | About:
(GuruFocus, September 11, 2009) The two gentlemen at the helm of Leucadia National Corp, Ian Cumming and Joseph S. Steinberg received far less attention than Berkshire Hathaway’s Warren Buffett. The truth is the two-man team produced an enviable track record in growing their company’s diversified business. This is from their 2008 Annual Letter to shareholders: for the 21 years from 1978 to 2008, they grew their company’s book value at an average rate of 17.3% per year. This is after a $11.00 write-off of 2008. In the same period, S&P returned 7.8% per year.

GuruFocus tracks their equity investing activities under “Ian Cumming”, but really, we are talking about the two-man team whenever we mention “Ian Cumming”.

Unlike Berkshire Hathaway, Leucadia does not have a multitude of subsidiaries, especially no insurance operating companies. The company is engaged in investment activities that is as defined by the two Gurus in the above mentioned annual report:
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. While we are not perfect in executing this strategy, we are proud of our long-term track record. We are not income statement driven and do not run your company with an undue emphasis on either quarterly or annual earnings. We believe we are conservative in our accounting practices and policies and that our balance sheet is conservatively stated.


Back in April 15, 2009, when Cumming and Steinberg published the annual report, they were really addressing the fear that gripped the company’s shareholders:


“Fortress Leucadia” is a draconian look into the future and a basis for defensive planning. It assumes we will not make any more investments, continue watching our expenses, keep only assets that are promising and slowly turn everything into cash which will be used first to retire or pay down debt, while always maintaining at least $500 million in cash or liquid assets.

That is the theory. The reality is we will continue to look for companies to buy, but only consider companies that earn money, have a bright future and are durable! In these troubled times there are sure to be good opportunities for investment and we will remain on the hunt. We can recognize a good deal when we see one and will strive to execute.


Then in the May 11, 2009 annual shareholder meeting, according to a write-up by GuruFocus Columnist, Inoculated Investor in this piece, Cumming responded to the a liquidity concern question:


If they don’t make an investments then they can last forever and a day. Not a likely scenario but if they could not find any investments they would return cash to shareholders. Operating cash flow is not a problem. They are working hard to make debt disappear. Have been buying back their debt. Are looking to de-lever going forward


Perhaps because of this conservative and defensive mood, during 2Q09 in which the market went through a near-death experience, we see very little activity on Cumming and Steinberg’s side. They essentially ended the quarter with about the same positions, the major improvement in their equity was primarily due to the appreciation of their existing positions. Is it because the market price had not fallen to a level they could call “ selling substantially below the values, which we believe, are there”, all they just do not have the cash to buy them? Recalling Warren Buffett also did not do much in terms equity investment during 2Q09, one had to wonder what stopped them from taking advantage of the current rally.

Carrying the day for Cumming and Steinberg during 2Q09 are the long term holdings;

No. 1: Jefferies Group Inc. (JEF), Weightings: 68.85% - 48,585,385 Shares

Jefferies Group Inc. offers a variety of services for institutional investors and middle-market companies. Jefferies offers financial advisory capital raising mergers and acquisitions and restructuring services to small and mid-cap companies. Jefferies Group Inc. has a market cap of $4.21 billion; its shares were traded at around $24.37 with and P/S ratio of 2.5. Jefferies Group Inc. had an annual average earning growth of 21.9% over the past 10 years.

Leucadia has owned 48.6 million shares of JEF since 2Q08.

No. 2: AmeriCredit Corp. (ACF), Weightings: 29.65% - 32,940,440 Shares

AmeriCredit Corp. is a leading independent automobile finance company. Americredit Corp. has a market cap of $2.15 billion; its shares were traded at around $16.15 with a P/E ratio of 269.2 and P/S ratio of 1.1. Americredit Corp. had an annual average earning growth of 13.2% over the past 10 years. GuruFocus rated Americredit Corp. the business predictability rank of 2.5-star.

Leucadia started a small position of 5.6 million shares in ACF since 4Q07. and it has been buying ACF since them. By 2Q09, it held 32.9 million shares. GuruFocus reported it increased ownership yet again on September 2, 2009.

No. 3: International Assets Holding Corp. (IAAC), Weightings: 1.37% - 1,384,985 Shares

International Assets Holding Corp. was formed for the purpose of serving as a holding company for International Assets Advisory Corp. International Assets Holding Corp. has a market cap of $147.5 million; its shares were traded at around $16.2 with a P/E ratio of 12.1 and P/S ratio of 1.2. International Assets Holding Corp. had an annual average earning growth of 1.1% over the past 5 years.

Leucadia has held 1.384 million shares of IAAC since 4Q06.

No. 4: Capital Southwest Corp. (CSWC), Weightings: 0.1% - 19,776 Shares

Capital Southwest Corporation is a venture capital investment company whose objective is to achieve capital appreciation through long-term investments in businesses believed to have favorable growth potential. The Company's investments are focused on early-stage financings expansion financings management buyouts and recapitalizations in a broad range of industry segments. The portfolio is a composite of companies in which the Company has major interests as well as a number of developing companies and marketable securities of established publicly-owned companies. Capital Southwest Corp. has a market cap of $290.5 million; its shares were traded at around $77.64 with and P/S ratio of 20.7. The dividend yield of Capital Southwest Corp. stocks is 1%. Capital Southwest Corp. had an annual average earning growth of 7.1% over the past 10 years.

Leucadia has owned a little under 20K shares since 3Q07.

No. 5: TravelCenters of America LLC (TA), Weightings: 0.04% - 275,308 Shares

TRAVELCENTERS OF AMERICA LLC. is a full-service national travel center chain in the U.S. with nationwide locations serving hundreds of thousands of professional drivers and other highway travelers each month - including virtually all major trucking fleets. Their travel centers operate under the `TravelCenters of America` `TA` and `Petro` brand names and offer diesel and gasoline fueling services, restaurants, heavy truck repair facilities stores and other services. Travelcenters Of America Llc has a market cap of $95.7 million; its shares were traded at around $5.75 .

This is a new position for Leucadia. It bought 275,308 shares during 2Q09.

Conclusion

Leucadia story actually goes beyond the five stocks we reviewed here. These are just the domestic companies. There are at least two foreign companies are significant: Inmet Mining Corporation

(“Inmet”), a Canadian-based global mining company traded on the Toronto Stock Exchange (Symbol: IMN), and Iron ore company Fortescue Metals Group Ltd (“Fortescue”) . Sufficient to say that Leucadia will do well if the global economy does rebound in the future and basic commodity prices recover. Not enough information is available for us to comment further.

For domestic holdings, the two gentlemen concentrated on financials. Not the big bank kind of financials, never the less, financials.

GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett and Ian Cumming for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.

About the author:

guruek
Mark's equity focus is identifying secular growth trends, and the companies most likely to benefit from these macro trends. Stocks are identified through fundamental analysis, although basic technical analysis is used in determining entry and exit points. With a degree in Economics from the University of Michigan, a broader understanding of the economy as a whole, along with interpreting investor psychology is also a major interest for Mark. His career background has focused on financial analysis in corporate America. Visit Mark's website at http://www.fundmymutualfund.com/

Visit guruek's Website


Rating: 2.9/5 (19 votes)

Comments

scubasteve10
Scubasteve10 - 4 years ago
The company is too expensive. 1.65x book value is incredibly high. There will probably be much better opportunities to buy in in the future at a lower price.
batbeer2
Batbeer2 premium member - 4 years ago
>> The company is too expensive. 1.65x book value is incredibly high.

The break-up value of LUK is not equal to it's reported book value.
scubasteve10
Scubasteve10 - 4 years ago
The majority of the company's major assets are publicly traded. Those publicly traded equities are marked to market. With ACF they now uses the equity method to account for it. It is on the books for a slight discount relative to market value. The majority of the rest of the assets are marked to market, hence book value is representative of their market value.. The company is a good one, but it is currently overvalued. If you like the company's major assets, then it is much cheaper to buy those publicly traded companies instead of buying LUK, to get the same assets at a much bigger discount.
batbeer2
Batbeer2 premium member - 4 years ago
A number of assets are not.

1) Fortescue borrowed some money from LUK in 2006. They carry that debt at ±1B.

LUK carries that debt at 100m. I believe neither number is correct. 1.5 B would be more nearly correct. The debt LUK owns is worth more than the equity. It is carried at cost and disappears under the radar.

2) The Cobre las Cruces project. A copper mine. Inmet paid ±10% of it's market cap for 70% of this mine in 2006. Thereby placing a value of ± .4B on that mine before there was so much as a hole in the ground.

The rest of the mine (30%) LUK still owns. How come the Inmet equity is such a large chunk of LUKs book value while the unsold part of the mine is worth just millions ?

3) There was a thread a while back on the LUK NOL.

It stands to reason that Fortescue would be willing to buy back that debt tomorrow for at least .6B (70cts to the dollar) and Inmet should be willing to pay ± .2B for the remaining part of the Cobre las Cruces mine.

Two examples of the book value understating break-up value by at least a factor of 4.

-EDIT-

- Most of this I get from the 2008 shareholder letter: http://www.leucadia.com/C&P%20Letters/C&P2008.pdf

- The NOL was written down in a big way. I expect it to be adjusted back up this year or the next; thereby increasing book value as reported. Pretty meaningless, but probably bullish.
batbeer2
Batbeer2 premium member - 4 years ago
>> It is much cheaper to buy those publicly traded companies instead of buying LUK, to get the same assets at a much bigger discount.

I grant you that; I bought some CSWC.
traderashish
Traderashish - 4 years ago
and why did you buy cswc. what did u like about it and what is your fair value estimate for it?
batbeer2
Batbeer2 premium member - 4 years ago
The short answer:

Cheap assets managed by great management. As you can see from my fair value vote, I believe the value is double the price.

The long answer: http://stocks.investopedia.com/stock-analysis/2008/capital_southwest_is_worth_more_with_less_cswc.aspx?partner=aol

...

Sherwood asserts that the company discounts the investments on its balance sheet at rates much too high, hurting the stock price. It currently trades at a 35% discount to net asset value. At the end of May, Sherwood delivered a proposal to the board of directors that would unlock some of the value in Capital Southwest. In it, Sherwood recommends two things:

1. That CSWC sell all its stock holdings that are unrestricted and distribute the cash to shareholders; and

2. Register and distribute its holdings in the Alamo Group (NYSE:ALG), Palm Harbor Homes (Nasdaq:PHHM), Encore Wire (Nasdaq:WIRE) and Heelys (Nasdaq:HLYS) to shareholders.

Unlock The True Value

These moves would deliver $82 in cash and stock to shareholders while retaining CSWC stock worth $85 in value plus $8 in cash for a total of $93. Sherwood estimates a value on the stock of $175 a share, despite the fact each of the four stocks are down significantly in the past year. Alamo, Palm Harbor, Encore Wire and Heely's are in the red 12%, 54%, 25% and 78% respectively. No wonder CSWC is itself down 21% in the last 12 months.

...


So.... IMO Sherwood is right. CSWC is mispriced. Management is right too for not liquidating the assets now. Like LUK, CSWC does sell assets now and then, it's just that they believe now is not the time. Patience.

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