Leucadia, Isle of Paradise, Place of Shelter?
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In Greek, leucadia means "isle of paradise" or "place of shelter." It's also the name of a seaside community outside San Diego. A fitting name, I'd wager. I haven't been there. But we're here to discuss the stock market, so our focus must shift to yet another Leucadia.
This Leucadia, Leucadia National (NYSE: LUK), is named after Leucadia, Calif. It's a conglomerate in the most traditional sense of the word: a motley assortment of businesses that has outlived most of its brethren. This type of company was fashionable in the 60s and 70s but is an endangered species in the U.S. One of the last holdouts besides Leucadia, ITT (NYSE: ITT), divested its Sheraton hotels in the 90s, and spun off two other divisions last year.
Leucadia's key subsidiaries operate slaughterhouses processing beef in Kansas, service and originate commercial mortgages, turn around troubled car dealerships, run the Hard Rock Hotel & Casino in Biloxi, Miss., provide oil and gas drilling services, and supply timber and copper. Boutique investment bank Jefferies Group (NYSE: JEF) will soon lead their ranks, once Leucadia acquires the 71% of Jefferies that it doesn't own already.
Under the Leucadia umbrella, you'll even find a manufacturer of plastics, vineyards in the Napa Valley, air rights behind Washington's Union Station, land in Myrtle Beach, S.C. and Panama City, Fla., and a San Diego biotech startup studying sickle-cell anemia. These are bit players in the grand scheme of things, but they make for good cocktail-party fodder.
Now, the question is whether Leucadia National deserves its Greek name, or whether it's yet another investment vehicle masking risky or toxic assets with an esoteric, innocuous name.
Let's look at the stock's performance and carry out a SWOT analysis.
Attractive valuation: LUK has a P/E of 10 and trades at 15% off book value.
Management has a strong track record:
- Long-term investment perspective;
- Relatively consistent book-value growth since the 70s;
- Proven Buffett-esque investment strategy focused on distressed assets; like the Oracle of Omaha, Leucadia's chairman is also known for his wit and candor in his annual letter to shareholders.
Leucadia is diversified and operates many businesses with barriers to entry or "moats."
Insiders hold almost 20% of the shares.
Berkadia, Leucadia's commercial mortgage subsidiary, is a 50/50 joint venture with Berkshire Hathaway (NYSE: BRK-B).
Heavy dependence on management's investment prowess.
Few synergies among subsidiaries: company will invest in anything that can generate outsized returns.
The conglomerate discount keeps the stock from reaching its full potential. Although this "Baby Berkshire" is based in New York, neither Wall Street nor Main Street gives it much attention. Companies that lack focus are no longer in vogue.
Management has called the company a play on inflation. Deflation would hurt performance.
With the decline in new construction, the timber business has been struggling.
Casino revenue in Biloxi has been decreasing. Besides the Hard Rock, there are ten other places to gamble along Mississippi's Gulf Coast, along with casinos in Baton Rouge and New Orleans, La.
Questions of succession have encircled this stock, but are starting to be resolved with the Jefferies acquisition. Upon the deal's closing, Jefferies CEO Richard Handler will assume control of Leucadia, while current CEO Ian Cumming will retire.
Garcadia, Leucadia's car dealership subsidiary, will benefit as Americans start replacing their aging vehicles.
As the real estate market rebounds, Leucadia's land may appreciate in value.
Sangart, Leucadia's biotech subsidiary, is a wild card that may come into play if its clinical trials prove successful.
Splitting the company in the distant future could unlock value for shareholders, but management has given no indication that it will do so.
Unpredictable commodities prices affect Leucadia's interests in copper, timber, and oil and gas drilling services. Be prepared for a wild ride.
National Beef is a low-margin, highly competitive business. It depends on Wal-Mart for 9% of its sales, and is extremely vulnerable to external events. In recent years, competitors have suffered amid E. coli scares, immigration raids, and harsh media attention. Remember the controversy over the "pink slime" picture of the meat used in McNuggets?
Jefferies and Berkadia depend highly on successful talent acquisition. That's HR-speak for "to survive, they must keep attracting quality employees."
Extreme weather along the Gulf Coast could affect the Biloxi casino.
The Bottom Line
A staid conglomerate, Leucadia attracts value-oriented Fools with its distressed stock price and its prudent, highly intelligent management team. But don't mistake it for a widows-and-orphans stock. It pays a meager 1.2% dividend and has been incredibly volatile (Beta = 1.76) since 2008.
Nonetheless, I'm a believer.
Want to add to this SWOT analysis? Share your thoughts in the comments section below.
Fool blogger Jonathan Lim is long Leucadia National. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Berkshire Hathaway, Jefferies Group, and Leucadia National. 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!