Largely Undervalued...Once Again
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Despite the company's obvious strengths, investors who stake out long positions in Loews Corporation (NYSE: L) invariably succumb to frustration and despair over the performance of their favored investment. This New York-based firm has perennially under-performed the expectations of its management team and shareholders. While it should be noted that the company has beaten the broader market during every 10-year period for the past 50 years and regularly buys back its own shares, Loews's investors seem afflicted by a perennial malaise.
The frustration is palpable. However, the company's well-known CEO is also increasingly bullish on the future of the natural gas industry, a space in which Loews invests heavily through its Diamond Offshore Drilling (NYSE: DO) subsidiary. Along with ongoing support provided by its thriving CNA Financial (NYSE: CNA) property and casualty insurance subsidiary and ever-stronger economic tailwinds, a boost in natural gas prices could finally provide Loews with the catalyst that it needs to break out.
Loews, CNA Financial and Diamond Offshore at a Glance
Loews is a diversified conglomerate that currently operates five subsidiaries. In addition to its signature hotel properties and a raft of onshore natural gas reserves in the Permian Basin, CNA Financial and Diamond Offshore are its two most compelling holdings.
For its part, CNA provides property and casualty insurance services to a wide range of businesses. It operates in three segments; Commercial, Specialty and Hardy. In addition to umbrella policies and general liability coverage, it also insures individual pieces of equipment and machinery. Meanwhile, Diamond Offshore runs an offshore drilling operation for oil and natural gas in the Gulf of Mexico and elsewhere. With nearly four dozen rigs and drill-ships, the firm specializes in reaching deepwater and ultra-deepwater reserves for a variety of clients within the energy extraction and processing industry.
All three of these companies are in solid financial shape. In 2012, Loews earned $568 million on about $14.5 billion gross revenue to produce a profit margin of about 4 percent. For CNA, the corresponding figures came in at $628 million, $9.5 billion and 6.6 percent. Meanwhile, Diamond earned $720.5 million on revenue of about $3 billion for a significantly better profit margin of 24.5 percent.
Over the past two years, Diamond Offshore's stock has not performed very well. From a high near $78 per share in April of 2011, the company's stock has zigzagged within a broad range. In late 2011, it broke down to near $50 per share but quickly recovered to trade above $60 for most of the subsequent period. Today, it sits near $66.50 per share and seems to be stuck in a short-term downward trend.
Meanwhile CNA's performance has mirrored that of the broader market. After touching lows near $22 per share during the market convulsions of mid-2011, it has appreciated steadily to rest near $32 per share today. As befits a company that operates in a relatively stable space, CNA is far less volatile than Diamond. It also sports a decent yield of roughly 2.5 percent.
Meanwhile, Loews has traded within a relatively narrow range between $34 and $43 per share. It currently sits near the upper bound of that range. Despite Loews's status as a "value" play, it features a yield of just .6 percent.
Seasoned market-watchers believe that Loews has a fair value of at least $48 per share on the strength of CNA, Diamond and its hotel business. After factoring in the company's intangibles as well as the added value of its smaller subsidiaries, its fair value may well exceed $50 per share.
Future Catalysts and Possible Plays
In response to ongoing investor frustration with the company's strategic direction, Loews released a tongue-in-cheek comic book story to accompany its latest financial report. The easy-to-follow story touts each Lowes subsidiary's successes and highlights their "hidden values."
This may actually be spot-on. In addition to its robust drilling and insurance operations, Loews also operates a hotel subsidiary that has performed admirably in a relatively soft economy. As the macro climate continues to improve, it seems likely that its occupancy figures will follow suit. Although investors should not expect explosive growth, it is unlikely that Loews's hotel business will actively hurt its overall performance.
The two principal catalysts for Loews's medium-term growth are rising natural gas prices and a favorable insurance climate. A recent report by the New York Times hit on an often-overlooked aspect of the natural gas market that may serve to boost prices even further, the use of liquefied natural gas as a transportation fuel. Meanwhile, CNA has been able to increase its insurance rates at a steady pace without inviting pushback from its customers.
In sum, investors who believe that the complex nature of Loews's operations belies a successful operation that is poised to grow would do well to watch the stock at its current levels. For a number of reasons, the company is seriously undervalued and could be ripe for a pop. With appreciation of more than 10 percent in the cards, investors who buy in at these levels may be rewarded for their foresight.
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Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends Loews. The Motley Fool owns shares of Loews. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!