The Best Little Conglomerate You've Never Heard Of

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What do beef processing, a casino, copper mining, mortgage servicings, timber, California wine, and gasification have in common, besides the possibility for a very strange party game? These are just some of the businesses owned by conglomerate investment company Leucadia National (NYSE: LUK).

It's an intriguing company and its annual letter from the Chairman and President is a must-read, as well written and humorous as any of Warren Buffett's. My favorite quote is about their philosophy of financing acquisitions, "We employ leverage in a careful way and do not intend to fall into the traps of employing too much leverage or borrowing short term and investing long. We will leave that silliness to the hedge funds." Preaching to the choir, brother!

The company owns and/or has a stake in such disparate companies as Oregon Liquified Natural gas, Leucadia Energy-Gasification, Garcadia (car dealerships), Conwed Plastics, Sangart (biotech with two products in Stage II trials), Idaho Timber, Crimson Wine Group, Keen Energy Services, Premier Entertainment (owns the Hard Rock Hotel & Casino in Biloxi, MS), Fortescue Metals Group, Berkadia Commercial Mortgage, Inmet Mining, and National Beef. Leucadia also owns Jefferies Group, the investment bank and securities firm as well as some scattered real estate holdings, the most significant of which is the Panama City, FL Airport land.

Normally, I wouldn't list all these but investing in Leucadia requires some extra due diligence as with any conglomerate or diversified holding company. Leucadia has an 11.76 P/E and a 1.00% yield. Its most direct competitors are Blackstone Group (NYSE: BX), Apollo Investment (NASDAQ: AINV) , and Kohlberg Kravis Roberts.

How It Works

Leucadia, headquartered on Park Avenue South in NYC, keeps its hands clean as its assets make the sausage (literally!) doing what private equity does, investing and advising companies. Competitor Blackstone does much the same thing, except with more involvement in funds, funds of funds, mezzanine financing, etc. Leucadia brings along companies in industries in which it thinks have upside or can bring its corporate expertise to bear in a competitive environment like California wine making. Its wineries have won Wine Spectator awards and are thriving. (The 2011 CEO letter advises shareholders are eligible for a 20% discount in the tasting rooms of The Crimson Group on the honor system).

If you hadn't already heard of Leucadia you might be thinking this all sounds like a little off the wall. Leucadia has a 50-50 joint venture with Berkshire Hathaway in the Berkadia Commercial Mortgage company. Leucadia's sounding a little more legitimate now. Buffett and Leucadia Chairman, investing guru Ian Cumming created Berkadia in 2009 and two weeks ago Berkadia purchased Hendricks & Co., an investment bank that specializes in multifamily real estate.

Everything Leucadia buys is thoroughly studied for potential for profit and the company is not afraid to play hardball with its assets as it had to with Fortescue Metals of Australia which it's suing for selling additional royalty notes. Leucadia maintains that dilutes its holding, adding, "We are happy with our Australian lawyers and will be even happier when we prevail," (from the 2010 CEO letter).

However, Leucadia's return on equity is a ho-hum 8.57%. But it has a huge insider hold by Chairman Cumming at 18,004,659 shares and 2,452,165 shares by CEO Joseph Steinberg. Also, it's been trading just below book value since 2011 with current book value at $25.32.

Leucadia is trading some 20% below its 52 week high as the company undergoes a change of management as Leucadia prepares Jefferies to be a wholly-owned subsidiary. Jefferies CEO Richard Handler will then become CEO of Leucadia.

How It Compares

Leucadia is much more of a value proposition than Blackstone which has an 106.10 P/E and a 2.20% yield. Blackstone is trading at a 52 week high, though, on news of deals closed on Motel 6, Vivint (number 2 in US home security and home automation), the purchase of Capital Trust's asset management platform, and several new funds. Blackstone's assets under management ballooned by almost a third to $205 billion from 2011 and analysts expect a 30% rise in EPS from $1.63 in FY 2012 to $2.13 for FY2013.

Blackstone's market cap at 9.6 billion is larger than Leucadia's at $6.1 billion. However, Blackstone as an alternative asset manager with its holdings in five segments: real estate, credit, hedge fund solutions, private equity, and financial advisory, means an investor has much more difficulty parsing the success of the many, many deals this company makes.

Competitor Apollo Investment is a very different animal from Leucadia as it's a BDC or business development corporation which is required to pay out larger dividends to shareholders much like a REIT. Right now its yield is 8.90% at a 73% payout ratio. It has a 7.37 P/E and is close to its 52 week high. BDCs are suddenly becoming hot in 2013 as REITs struggle but J.P. Morgan downgraded Apollo Investment to neutral on January 15.

Apollo Investment is only a $1.8 billion market cap company and is considered a non-diversified management investment company. As a source of investing capital from small to medium businesses its revenues are variable as they swung from $161.42 million to $29.96 million to $196.22 million for the first three quarters of 2012. That's a little too volatile for my blood.

How It Pays Off

Several of Leucadia's investments were considered very contrarian especially timber, copper, and mortgage financing when Leucadia got into these, especially mortgage financing in 2009, but these were great illustrations of buying when others are fearful, the famed adage of Leucadia's partner Warren Buffett. Some have even called Leucadia a baby Berkshire.

One of these investments should pay off very soon as Leucadia should profit from its 15.92% stake in Inmet Mining if the takeover bid by First Quantum Minerals for Inmet is approved by shareholders. Also, the National Beef Company and Jefferies are both looking very good here with Jefferies having reported in December a 48% rise in profits.

Leucadia is underowned, underrated, and underappreciated as well as under book value. There are some very good times ahead as ventures undertaken in the depths of the 2008-9 recession now come to fruition, including the vineyards. And don't forget shareholders get a discount in the tasting rooms!

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