Monday, February 7, 2011

Loews: Play it Again

My grandfather used to tell the same stories over and over again.  Don't misunderstand.  They were good stories, but each repetition brought a range of emotions - sadness, love and yes, a tinge of embarrassment.  A great man trying to relate and finding it increasingly difficult to do so. 

All of these memories came back while listening to today's Loews (L) conference call.

This is a company with real assets - hotels, oil rigs, and pipelines.  They even own an insurance company for heaven's sake!  Doesn't that old guy in Omaha (what's his name again?) own an insurance company (or 2)?  And Loews has CASH... lots of it... Net Cash and Securities has reached $4 billion.

Bruce "We Count Cash" Berkowitz of Fairholme fame should love Loews, but he's AWOL.  He prefers Sears (SHLD), which seems to have a similar theme, but less compelling assets compared to Loews.

Does anybody care?   Has management given up? 

The Q&A session seems to go quicker every quarter.  Long-term owners can practically recite the answers. 

One lone analyst actually asked if Loews was committed to owning CNA Insurance long-term.  It was almost a plea for mercy.  Please, please, please.  Anything, but insurance.  Or perhaps it was a call to action?  An attempt to unlock value.  No matter.   Guess the answer.

Jim Tisch even went so far as to tell the story of Diamond Offshore for the umpteenth time.  Loews bought its first rigs for less than scrap value.  The business was given up for dead and everyone hated it.  But not Loews... they are value investors... good ones!   Look at offshore drilling today.  Only President Obama thinks offshore drilling is a thing of the past.

In addition to that old Diamond Offshore story, the rest of the Loews quarterly report was a repetition.  Shares outstanding down.  Cash and securities up.  Increasing dividends to the parent company.  Stay the course.  Boring, but awesome.

The problem: everyone who knows (or cares) already owns L shares.  After 2008-2009, one would think that investors would be clamoring for Loews-type companies.  But it is met with apathy.

Maybe the Loews Value Story  isn't cool in a world where Facebook is supposedly worth $50 billion.  Is skepticism dead?  Insurance?  Assets, cash, profits?  A tired concept of a dying age, right?   And this, in the same week that News Corp is rumored to be parting with MySpace (ah, those were the days) for the garage sale price of $200 million?

In an apparent attempt to commiserate, another lonely questioner asked Loews managers if it was possible to have too much cash.  They answer (predictably) - yes, you can, but no we don't.  It's the same yarn quarter after quarter.  So too are the questions about possible acquisitions.  And the stock answer: No comment.

The problem is NOT a case of too much cash (or insurance), but of unrealized value.  Why would Loews buy anything except its own shares?  Anything under the Loews' umbrella automatically earns a (minimum) 30% haircut courtesy of Mr. Market.

If you want to see how quickly $4 billion can go missing, just look closely at Loews.

The company owns 242.4 million shares of CNA Insurance (CNA), 70.1 million shares of Diamond Offshore (DO), and 102.7 million shares of Boardwalk Pipeline (BWP).  Combined value: $16.2 billion (or $39 a share).

Loews in toto has a market value of $17.8 billion (or $43 a share).

So all the non-publicly traded assets of Loews are valued at $1.6 billion (or $4 a share).  A full list of the "missing" assets can be found (on the cloud) at the company website.  The highlights include: Loews hotels, Highmount natural gas, and that $4 billion pile of cash and securities (net of ALL debt).  Any of these assets could individually account for that $1.6 billion "stub" value.  So the rest is free.

Is it Loews and its philosophy that's gotten old and out of touch?  Or is Mr. Market senile?

The trouble is that Loews' discount to the sum of its parts is a constant.  One gets the impression that management has given up.  Their creation trades at a persistent and significant discount, while that other guy's company (Berkshire Hathaway) gets a modicum of respect.  Warren Buffett (that's the guy!) even counts Berkowitz among his shareholders.

Perhaps Loews should send a Valentine to Coral Gables?

For those who own Loews, the value story never gets old.  It is an investment to own and cherish.  But today's conference call was bit sad and slightly embarrassing.  And no, I'm not talking about James Tisch announcing his new blog!

It's time for a new approach to Mr. Market.  A sledge hammer, perhaps?

How about an offer to go private?

Like Grandpa, Loews would be missed if it was gone.  And I'd need to find another story to tell.

Disclosure: Long Loews.

5 comments:

  1. I don't understand why they don't just distribute CNA and DO shares for a tax-free transaction

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  2. Here's a very simple idea: raise the dividend. That will get L on the divvy-hungry screens that seem to be ubiquitous these days. But not only for that reason, they can afford to do it and it may be a better use of shareholder money than sitting the pile of cash.

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  3. I like your analysis, but there are a few concerning points...

    DO is not necessarily well-positioned for the future in offshore drilling. I own Noble Corp. and believe that Diamond is in the worse shape of all of them, save maybe Seadrill due to their highly risky capital structure. The Ensco/Pride merger will consolidate the industry further, but Diamond's older fleet makes their pricing power difficult, considering the new fleets of Ensco & Noble. The next few years may prove difficult for Diamond.

    I'd caution you on a sum-of-parts valuation unless you know the underlying value of the parts. Diamond is likely worth less than it is selling for in the market today; the same could perhaps be said about some of Loew's other major holdings.

    It reminds me of Li Lu with an Asian department store he invested in. He made sure the business he bought was undervalued, but, in addition, made sure that the partly-owned subsidiaries were also undervalued as well.

    Just make sure the parts are worth what you think they are; this may very well be a good investment, I just wanted to caution you on Diamond and on your sum-of-parts analysis.

    It was a good read- I enjoyed your article.

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  4. Have you done any analysis to justify an investment in Loews assuming that the sum-of-parts discount persists?

    Even assuming that the discount persists, that doesn't mean that Loew's won't generate superior returns (in line with its 15% track record). I'm just struggling to determine a way to model it.

    My intuition is there is some way to estimate returns based on: 1) holding company dividends received - $1.2b in 2008, $954m in 2009, $720m in 2010 (4.5% yield on current market cap). 2) share count reductions from 553m in 2006 to 420 in 2010.

    My sum-of-parts is $50, and the share price is a little under $40. L averaged $1b of dividends from holding cos, which it can reinvest in itself at $0.75 on the dollar. That's got to be highly accretive.

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  5. what about the 57B in liabilities on its balance sheet ? how can you ignore that ?

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