Monday, May 3, 2010

Loews Update

Loews (L) reported quarterly earnings today and (joy of joys) the company "beat expectations". For about 20 minutes, the market got excited. But it was for all the wrong reasons. For Loews, reported earnings are essentially meaningless given its holding company structure. The consolidation of CNA Insurance (a publicly traded subsidiary) makes matters even worse.

If you're buying Loews based on its earnings report, you've missed the point.

Barron' attempts to focus investor attention on the essentials in today's article entitled: Why Loews Can Reach New Highs. Author Avi Salzman says (in part):

Investors can buy all of Loews' assets at a discount to their sum-of-the-parts value, and based on Monday's results, that discount continues to be quite attractive.

In fact, Loews shares are trading below the net-asset value of its public holdings, meaning investors essentially get the company's $3.4 billion in cash and its other assets, for free. A back-of-the envelope calculation of Loews' new asset-value yields a value of about $53 per share, well above the current share price of about $37. That's about a 29% discount.

Loews has historically traded at a discount to its net-asset value, in part because shareholders have to weigh concerns about the company's future investments. But the company has traded at a more significant discount over the past year or so, making its shares more attractive. Prior to the recession, shares traded at closer to a 20% discount to net-asset value.

The company has aggressively repurchased its own stock in recent quarters, buying 6.8 million shares through April for about $250 million. Since the second quarter of 2009, Loews has repurchased about 17.4 million shares, or about 4% of its outstanding shares. And even as it increased its buybacks, the company also grew its cash position, from $2.5 billion after the first quarter last year to $3.4 billion this year.

Looks like somebody's been reading The Lonely Value Investor!

Increasing cash and share buybacks should interest potential shareholders. After all, the Loews management team doesn't repurchase stock willy nilly (a technical term). In the past, they have been very disciplined with an eye towards intrinsic value. So this passage from the earnings release got my attention:
At March 31, 2010, there were 419,733,029 shares of Loews common stock outstanding. During the three months ended March 31, 2010, the Company purchased 5,387,600 shares of its common stock at an aggregate cost of $197 million. From April 1, 2010 through April 28, 2010, the Company acquired an additional 1,245,900 shares of its common stock for $47 million.
Regardless of whether or not the company "beat expectations", this is meaningful. The Tisch family is careful with their cash. And they know a bargain when they see it.

Despite a drop in the value of Diamond Offshore (DO), the public assets of Loews continue to be worth more than the whole. In fact, the non-public assets (and all that cash) continue to garner a negative value.

Market value of the 3 public stakes owned by Loews: $15.8 billion
Market value of Loews: $15.7 billion
Market value of the "stub": negative $100 million

The market's got this one dead wrong... and Loews knows it.

They're buying Loews shares... and you?

Disclosure: Author owns Loews shares.


  1. There are some stocks trading even less than half of net assets in Hong Kong, which are controlled by families. For some cases they were finally privatised by controlling shareholders, making share prices much higher, but it always took a long time. Anyway, of course I think L is always attractive. If it spin-offs some assets, that can create some interesting opportunities.

  2. Loews Z-Score is 1.81 by my calculations, which puts the company in the "grey zone" for bankruptcy risk. Most successful companies are happily above 2.6, which is the minimum for "safe" zone companies.

  3. I suppose the Z-score puts L in the "grey zone" for bankruptcy risk much like driving a car or crossing the road puts one at risk of getting smacked by a giant truck. Or, getting struck by lightning while taking a stroll through Central Park on a nice Spring day. C'mon now, Lyric, look at how much cash they have on hand (close to $3 billion); then consider the managers of Loews and how long they've been in the business, etc. Z-Score, A-score, whatever-score means absolutely nothing without introspection.

  4. I just did the numbers by hand in Excel, and it looks like the range for z-score is 0.86 (if the were in manufacturing) to 1.93 if there were not in manufacturing. Both scores are not favorable for bankruptcy outlook. Below 1.8 is "distressed" and 1.8-2.6 is "grey."

    These are just stats, but they are a red flag. They're cutting it close, and that's likely the reason that they are trading at such a discount -- they have a real risk of going broke and having to actually sell off their holdings.

    They're in insurance and drilling hotels and movies. A serious glitch in any of them and you have a recipe for disaster.

    They are not growing, and are trading about PE 8.5, which is a fair value for a company that isn't growing, according to Graham. With the bankruptcy risk that may not be a "fair value" after all.

  5. That's an interesting take and may very well justify the persistent discount. I wonder how the Z-score has tracked in the past. Is it possible for you to crunch the #s? Perhaps not necessarily a continuous time-series, but say a snapshot every 6 -12 months for the past 20 years? It would be interesting to see the Z-score's range and its historic correlation to the performance of the stock. By the way, has the Z-score been shown to be statistically significant vis-a-vis stock performance (especially relative to the S&P500)?