Leucadia National Corp (LUK, Financial) is an investment company with diverse holdings in lumber and plastics manufacturers, a hotel and casino, wineries, an oil and gas contract driller, energy production facilities, medical product developers, and other real estate interests, to wit, Conwed Plastics; Idaho Timber; Keen Energy Services, and ResortQuest, just to mention some.
Leucadia's way of doing business deserves the nickname of “miniature Berkshire Hathaway.” You may be asking yourself why. Does “investing in companies while their intrinsic value is low to allow compounding” sounds familiar to you? Of course it does. It's Warren Buffett's strategy. Well, Leucadia has followed Berkshire's path. Indeed, it has achieved assets of over $9 billion.
However, comparisons are dreadful and here are two main differences between both companies. While Berkshire Hathaway longs for companies with long term competitive advantages and strong management, Leucadia goes with the “cheap and messed up” spectrum. Indeed, it invested in Cobre Las Cruces when the commodity boom was about to “expire.”
Leucadia has few investments, and not all of them gave good results. Having few investments is somehow dangerous because large amounts of money are invested in the business and large amounts of money are lost if the deal is not profitable. On the contrary, Buffett's Company has a significant number of deals to profit from.
Despite Leucadia's new denomination does not make it very similar to Berkshire Hathaway, I still long for investing in it. From my standpoint, an essential issue that makes it attractive is its solid management. Chairman Ian Cumming and President Joseph Steinberg have been managing above-average investment results for more than 30 years. Moreover, they own a large percentage of the company´s shares, which means that they are aligned with shareholders´ interests.
Management, although a key factor, is not the only positive element Leucadia holds. Since 1979, it has kept a double-digit compound growth rate. In 2008 the stock price hit $54. Although today it has dropped to $33, I still see it profitable because no one can find such a well-managed company at such a discount, and the company's portfolio comprises businesses that are able to survive any crash. All in all, there is no wonder it has always been compared to Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial). Its investments in different industries have enabled the company to be in different markets and have given it the chance to look for diversity in its deals.
You may be asking yourself whether the company is so perfect or not. Unfortunately, it has its risks and cons too. To start with, Ian Cumming and Joseph Steinberg will remain in office until 2015 and apparently, such strong management won't succeed without them. Indeed, they considered winding the company up.
Another issue is related to growth. The levels of the company's growth will make capital redeployment more difficult, especially at high rates of return and as I have mentioned before, the so called “jockey bets” that have not turned out as expected have made the company lose large amounts of money.
An analysis of the pros and cons is always necessary before investing. But I think that Leucadia's pros outnumber its cons. I would definitely invest in it.
My investment thesis is based on the premise that Leucadia National, whose owner-operators Ian Cumming and Joseph Steinberg own 18.5% of shares outstanding, boasts a compound annual growth rate in book value of 19.6% since 1979 – one of the top performing portfolios of the modern era. In 2010, LUK recorded a 34.3% return on equity, yet the company currently trades at a 20% discount to book value. As was observed above, implicit in such a discount is the assumption that this particular book value will not generate any future profits and, accordingly, incorporates a liquidation scenario. Any company that is profitable and is expected to generate future profits is worth, upon arms-length sale, more than book value – it is a fact of business. In my view, returns such as those generated by LUK should command a substantial premium, and I believe that in the fullness of time the market value of the shares will reflect the intrinsic value of the diversified portfolio of financial, industrial and basic materials businesses.
Leucadia's way of doing business deserves the nickname of “miniature Berkshire Hathaway.” You may be asking yourself why. Does “investing in companies while their intrinsic value is low to allow compounding” sounds familiar to you? Of course it does. It's Warren Buffett's strategy. Well, Leucadia has followed Berkshire's path. Indeed, it has achieved assets of over $9 billion.
However, comparisons are dreadful and here are two main differences between both companies. While Berkshire Hathaway longs for companies with long term competitive advantages and strong management, Leucadia goes with the “cheap and messed up” spectrum. Indeed, it invested in Cobre Las Cruces when the commodity boom was about to “expire.”
Leucadia has few investments, and not all of them gave good results. Having few investments is somehow dangerous because large amounts of money are invested in the business and large amounts of money are lost if the deal is not profitable. On the contrary, Buffett's Company has a significant number of deals to profit from.
Despite Leucadia's new denomination does not make it very similar to Berkshire Hathaway, I still long for investing in it. From my standpoint, an essential issue that makes it attractive is its solid management. Chairman Ian Cumming and President Joseph Steinberg have been managing above-average investment results for more than 30 years. Moreover, they own a large percentage of the company´s shares, which means that they are aligned with shareholders´ interests.
Management, although a key factor, is not the only positive element Leucadia holds. Since 1979, it has kept a double-digit compound growth rate. In 2008 the stock price hit $54. Although today it has dropped to $33, I still see it profitable because no one can find such a well-managed company at such a discount, and the company's portfolio comprises businesses that are able to survive any crash. All in all, there is no wonder it has always been compared to Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial). Its investments in different industries have enabled the company to be in different markets and have given it the chance to look for diversity in its deals.
You may be asking yourself whether the company is so perfect or not. Unfortunately, it has its risks and cons too. To start with, Ian Cumming and Joseph Steinberg will remain in office until 2015 and apparently, such strong management won't succeed without them. Indeed, they considered winding the company up.
Another issue is related to growth. The levels of the company's growth will make capital redeployment more difficult, especially at high rates of return and as I have mentioned before, the so called “jockey bets” that have not turned out as expected have made the company lose large amounts of money.
An analysis of the pros and cons is always necessary before investing. But I think that Leucadia's pros outnumber its cons. I would definitely invest in it.
My investment thesis is based on the premise that Leucadia National, whose owner-operators Ian Cumming and Joseph Steinberg own 18.5% of shares outstanding, boasts a compound annual growth rate in book value of 19.6% since 1979 – one of the top performing portfolios of the modern era. In 2010, LUK recorded a 34.3% return on equity, yet the company currently trades at a 20% discount to book value. As was observed above, implicit in such a discount is the assumption that this particular book value will not generate any future profits and, accordingly, incorporates a liquidation scenario. Any company that is profitable and is expected to generate future profits is worth, upon arms-length sale, more than book value – it is a fact of business. In my view, returns such as those generated by LUK should command a substantial premium, and I believe that in the fullness of time the market value of the shares will reflect the intrinsic value of the diversified portfolio of financial, industrial and basic materials businesses.
