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Murray Stahl Adds Howard Hughes, Leucadia National and CBOE Holdings

August 22, 2011 | About:
Murray Stahl is the Co-founder, chairman, and chief envestment officer of Horizon Asset Management Inc. Horizon's investment philosophy places heavy emphasis on the mitigation of risk, assessing risk in terms of the probability of real capital loss. It then selects securities with "asymmetric return properties" where the reward potential exceeds downside risk in magnitude and probability, creating a margin of safety. Horizon also targets companies with strong fundamentals that have fallen out of favor with market consensus. It seeks opportunities when negative news creates an overreaction by analysts and subsequently results in favorable price inefficiencies. Finally, Horizon places a higher emphasis on a qualitative approach rather than a quantitative approach, using quantitative analysis to enhance fundamental research.

Stahl has overseen all of the investment strategies since Horizon's inception. Its Core Value Strategy focuses on businesses that are insulated from price competition or technological obsolescence which can sustain a high return on equity. It utilizes a bottom-up approach, though portfolio weightings may reflect favorable risk/reward in particular sectors. This strategy has enabled the Core Value fund to generate a ten-year return of 81.5%, outpacing the S&P 500's return of 16.4%. In his second quarter portfolio update, Stahl's biggest moves included adds to his positions in Howard Hughes (NYSE:HHC), Leucadia National (NYSE:LUK), and CBOE Holdings (NASDAQ:CBOE).

The Howard Hughes Corporation (NYSE:HHC)

Stahl first purchased Howard Hughes in the first quarter of 2011, buying 1,519,489 shares of the stock at an average price of $58.36. In his most recent move, he added another 2,640,113 shares at an average price of $67.25, impacting his portfolio by 2.51% and giving him a total of 4,159,602 total shares of the company. The price has since decreased 25%.

Howard Hughes Corporation operates as a real estate company engaged in the development of master planned communities and other strategic real estate development opportunities across the United States. The Company operates its business in two lines of business: Master Planned Communities and Strategic Development. Its Master Planned Communities segment consists of the development and sale of residential and commercial land, primarily in large-scale projects in and around Columbia, Maryland; Houston, Texas; and Las Vegas, Nevada. Its Strategic Development segment is made up of near, medium and long-term real estate properties and development projects.

According to Howard Hughes' second quarter report, revenue increased to $50.8 million, up 66% over last year's revenue o f $30.6 million. This was largely a result of increased Master Planned Community (MPC) land sales and condominium unit sales. Net income attributable to common stockholders was $66.0 million, up from last year's net loss of $28.0 million. However, excluding a $56.9 million non-cash gain relating to the decrease in estimated value of outstanding warrants during the quarter, adjusted net income was $9.1 million.

Master Planned Community (MPC) land sales were $31.1 million for the quarter, up 88.5% over last year's $16.5 million of land sales. This was largely due to Summerlin MPC's $11.4 million of residential lot sales in the quarter as Summerlin had no land sale revenue last year due to weaker Las Vegas real estate market conditions. Bridgeland's land sale revenues increased to $5.0 million, up 51.2% over last year's $3.3 million.

Howard Hughes' thirteen Operating Assets generated $10.4 million in net operating income in the quarter, down $0.8 million over last year. The decreases were a result of past due percentage rent of $0.4 million last year, one-time revenues of approximately $0.3 million relating to World Cup Soccer events last year, approximately $0.3 million lower rental revenues relating to a tenant in liquidation, and higher energy costs. These decreases were partially offset by new leasing activity and lower property tax expenses.

On 7/1/2011, Howard Hughes acquired its partner's 57.5% legal interest in The Woodlands for $117.5 million, making it a wholly owned subsidiary. The Woodlands generated $24.4 million in total land sales in the quarter, up over last year's $22.4 million.

On 8/4/2011, Howard Hughes announced that it is partnering with The MacNaughton Group and Kobayashi Group to evaluate the development of a luxury condominium tower at Ala Moana Center. Howard Hughes owns the rights to develop a residential condominium tower over a parking structure at Ala Moana Center, one of the "most visited and successful shopping centers in the world." Ala Moana Center hosts approximately 42 million visitors each year.

Howard Hughes was spun off of General Growth Properties, Inc. in November of 2010. The company has a market cap of $1.9 billion. Its P/S ratio is 10.17. Its P/B ratio is 0.89. The company has virtually no debt on its balance sheet.

Leucadia National Corp. (NYSE:LUK)

Stahl held more than 17.6 million shares of Leucadia when the stock traded for an average of $45.10 back in the first quarter of 2008. He sold 4.8 million shares the next quarter when the average price rose to $51.63, but prices plunged to less than $16 in less than a year. During this stretch, Stahl sold another 11 million shares, and he continued to sell 1 million more shares when prices went sideways in late 2009 and early 2010. In late 2010 and early 2011, the stock's price began to climb back up. In Stahl's most recent move, he added 64.96% to his position in Leucadia, impacting his portfolio by 2.33% and giving him 11,877,583 total shares. The price has since decreased 27%.

Leucadia National Corporation is a holding company that, through its subsidiaries, engages in manufacturing, telecommunications, land based contract oil and gas drilling, property management and services, gaming entertainment, real estate activities, medical product development, and winery operations in the United States. It is also involved in mortgage origination and mortgage servicing through its joint venture company Berkadia Commercial Mortgage.

According to its 10-Q SEC filing, Leucadia's revenue for the quarter was $753.4 million, up from last year's $289.2 million. This was largely driven by net securities gains of $529.6 million coming from the sale of a portion of the company's investment in the common shares of Fortescue Metals Group, a dramatic increase over last year's net securities gains of $71.4 million. Net income attributable to Leucadia National Corporation common shareholders for the quarter was $186.3 million, improved from last year's $235.1 million net loss. Last year's figures included a $321.9 million loss related to associated companies net of income tax, whereas this year's losses related to associated companies was only $145.8 million, net of income tax.

Revenues for Idaho Timber decreased from $53.5 million last year to $41.8 million, with shipment volume down 15% and average selling prices down 9%. The abundance of existing homes for sale and high unemployment negatively impacted housing starts and Idaho Timber's revenues for the quarter. As a result, Idaho Timber recorded a pretax loss of $2.0 million versus its pretax gain of $1.5 million last year.

Conwed Plastic revenues were $22.8 million, down slightly from last year's $23.6 million, as a result of declines in all markets related to the housing industry and the filtration market though revenues from certain consumer products increased slightly. Raw material expenses also increased, adversely affecting gross margin. Conwed Plastic recorded a pretax gain of $1.7 million, d own from last year's pretax gain of $3.0 million.

The company's Oil and Gas Drilling Services is operated under the company Keen. Keen's revenue for the quarter was $32.1 million, up over last year's $29.3 million. Keen's rig utilization and dayrates increased substantially during the quarter as the negative impact of low natural gas prices was partially offset by a greater proportion of Keen's customers using its rigs to drill for oil other than natural gas. Keen's pretax income was $532,000, up from last year's $504,000.

The company's Gaming Entertainment segment is operated under the company Premier. Premier's gaming revenues increased 10%, from $28.1 million to $30.5 million. Although the local gaming market was largely unchanged, the company attributes its revenue growth to its customer loyalty programs and enhancements. Premier's pretax income was $2.7 million, up from last year's $1.8 million.

Among other segments, Domestic Real Estate lost $44,000 in the quarter, improving from last year's loss of $1.6 million. Sangart, the company's Medical Product Development business, lost $9.4 million before income taxes as it is a development stage company that does not have revenues from product sales. Other operations saw a decrease in revenue from $24.1 million to $14.6 million and a decrease in pretax income from a $5.1 million gain to a $7.4 million loss.

Leucadia has a market cap of $6.9 billion. Its P/E ratio is 3.28, very close to its ten-year low. It's P/S ratio is 5.24, roughly in line with its ten-year average. Its P/B ratio is 1.02, also in line with its ten-year average. Leucadia has a strong balance sheet with a debt-to-equity ratio of .216.

CBOE Holdings Inc. (NASDAQ:CBOE)

Stahl initiated his current position in CBOE Holdings in the fourth quarter of 2010, purchasing 1,269,166 shares at an average price of $23.32. He slightly reduced his position in 2011 when he sold 175,700 shares. In his most recent move, Stahl added to his position by 570.23% at an average price of $26.06, giving him 7,328,719 total shares and impacting his portfolio by 2.24%. The price has since decreased by 11%.

CBOE Holdings, Inc. intends to operate as the holding company for Chicago Board Options Exchange (NASDAQ:CBOE), which operates as an organized marketplace for the trade of standardized, listed options on equity securities. CBOE trades options on individual equities, market indexes, and exchange-traded funds.

According to the company's second quarter report, CBOE Holdings recorded revenues of $120.3 million, up 7% over last year's $112.6 million. This increase reflected a $14.7 million increase in access fees, partially offset by a $7.8 million decrease in transaction fees. The increase in access fees was due to a new trading access program, as the CBOE began charging monthly fees to all trading permit holders on July 1, 2010. Transaction fees decreased 8% due to a 16% decline in trading volume, offset somewhat by a 10% increase in average transaction fee per contract. Trading volume in the quarter was 280.2 million contracts, down from last year's volume of 334.4 million contracts. Last year included CBOE's largest month ever for trading volume in May 2010 when "extraordinary market events resulted in record options trading volume."

Total operating expenses declined to $63.8 million, down 7% from last year's $70.8 million, due to lower expenses for outside services and trading volume incentives. Operating Margin increased 980 basis points, from 37.1% to 46.95%, marking the fourth consecutive quarter of year-over-year earnings growth in excess of revenue growth as well as a ten-quarter record high for operating margin. Overall, net income allocated to common stockholders increased 32%, from $24.8 million to $32.6 million.

On 8/2/2011, CBOE Holdings announced that its Board of Directors approved a share repurchase program that authorizes the company to purchase up to $100 million of its unrestricted common stock, or approximately 5% of the company's market cap.

On 8/5/2011 CBOE Holdings announced that trading volume reached an all-time high with 10,825,600 contracts traded. This was followed by another all-time high on the next trading day, 8/8/2011, when 10,856,041 contracts were traded, marking consecutive single-day volume records.

CBOE Holdings has a market cap of $2.05 billion. The stock trades with a P/E ratio of 18.5. Its P/S ratio is 4.5, and its P/B ratio is 9.24. The company carries no long-term debt on its balance sheets. It generated $74.2 million in free cash flow in the quarter, up from the $60.5 million it generated last year.

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Rating: 2.9/5 (11 votes)


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