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L or LUK (or MKL)?

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December 12, 2014 – Comments (1) | RELATED TICKERS: L , JEF , MKL

Loews or Leucadia?  I’ve been eying both of these companies for the better part of 2 years.  They’ve both been trading consistently below book value, which is fairly rare for these 2 particular holding companies.  Leucadia is commonly referred to as a “mini-Berkshire Hathaway,” though this really isn’t appropriate – Leucadia doesn’t own an insurance company.  Owning an insurance comany was the foundation for Berkshire’s growth.  Loews, on the other hand, actually does own an insurance business, [possibly] making L a more appropriate comparison to BRK.

Loews (L)

Loews is a holding company.  Loews subsidiaries are engaged in commercial property and casualty insurance, operation of offshore oil and gas drilling rigs, exploration, production and marketing of natural gas and oil (including condensate and natural gas liquids), interstate transportation and storage of natural gas and operation of hotels. The Company’s subsidiaries include CNA Financial Corporation, which is a 90% owned subsidiary; Diamond Offshore Drilling, Inc., which is a 50.4% owned subsidiary; Boardwalk Pipeline Partners, LP, which is a 61% owned subsidiary, and Loews Hotels Holding Corporation. (Google)

Loews has been buying additional shares of DO in the wake of the recent price meltdown in the energy sector.  Diamond is a well-run driller, and has one of the cleanest balance sheets in the industry.

Loews trades at 0.76x Book Value.

Leucadia (LUK)

Leucadia is a holding company.  Leucadia’s largest business is Jefferies, a global, full service investment banking firm. Leucadia also owns and holds investments in a range of other businesses, including beef processing, manufacturing, telecommunications, gaming, real estate, and energy. (Google)

While Jeffries has been performing well, their beef business (National Beef) has not been generating profits recently.  This has led to depressed company profits.

Leucadia trades at 0.78x Book Value.

Peak to Peak Growth

A good assessment I learned when looking at holding companies, banks, or insurance companies is to compare “peak-to-peak” changes in book value per share.

L:

Dec 2007 BPS: 33.2

Current BPS: 52.01

57% growth

LUK:

Dec 2007 BPS: 25.03

Current BPS: 28.18

12.5% growth

L has really outperformed LUK during this timeframe.  I know that BPS isn’t the perfect measurement for assessing a company’s intrinsic value, but it’s probably the best assessment of intrinsic value that’s easy to track.

I’m torn between these 2 because LUK is the company commonly referred to for its great management (though new management was recently installed), but L has the P&C insurance business and is also a play on a currently depressed oil market (Diamond Offshore).  And as the numbers show, L has done a much better job consistently growing book value.

The Brooklyn investor did a big study on Loews insurance business a few years back, and found that it was a pretty poorly run insurance company.  It has years of underwriting losses (which is common, but not ideal) rather than underwriting profits.  But it could simply be that they are such good capital allocators, they can get the job done even with a mediocre insurance business.  Buffett has always just had the luxury of having really great insurance businesses (a testament to his knowledge of mediocre versus great companies - he "picked" the right ones).

MKL

MKL is probably a better comparison to BRK, although the CIO's investment philosophy differs quite a bit from Buffett (diversification versus concentration).  The “peak to peak” (2007 to recent) BPS growth for Markel was 94%!  That absolutely crushes the BPS growth for L or LUK.  It could be that I simply need to stop hunting for value, and go with the best in breed, which seems to be Markel.  There are a couple really, really good blog posts right now that are still showing MKL still being significantly undervalued.

1 Comments – Post Your Own

#1) On December 12, 2014 at 11:54 AM, ElCid16 (94.71) wrote:

Just as a disclosure, MKL is my 3rd largest RL holding, and my largest holding that is not an ETF.

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