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 Reports and Commentary from the Investment World

Reports and commentaries are posted here on a regular basis.


Leucadia National


Leucadia National (LUK:NYSE)

Leucadia National was founded in 1854. At that time it used to finance stocks for the Union army! It is based in New York and recently it has been likened to a "Baby Berkshire Hathaway". Companies that Leucadia invests in range from manufacturing, telecommunications, land based contract oil and gas
drilling, property management and services, gaming entertainment, real estate activities, medical product development, and winery operations in the United States. A partial list of Leucadia's investments includes: Idaho Timber, Conwed Plastics, STi Prepaid, the Hard Rock Hotel & Casino Biloxi, Pine Ridge Winery, ResortQuest, Goober Drilling, Fortescue Metals, Cobre Las Cruces, Inmet Mining, Jeffries Group, AmeriCredit and Cresud.

Ian Cummings and Joseph Steinberg took over Leucadia National (NYSE: LUK) in the late 1970s. Leucadia is a collection of investments and operating units pieced together in the same light as the much larger Berkshire Hathaway, and its track record is nearly as impressive. For years Cummings and Steinberg, who own around 22% of the company, have generated impressive returns,and while they don't get the press coverage that Warren Buffett does, they nearly match him for their must-read annual letters. A very unusual bad year has clubbed the stock down by 60% from its highs of early 2008!
We think it may be a good time to invest in Leucadia National.

Leucadia isn't a mirror image of Berkshire,hathaway  but it's similar. Leucadia has amassed various businesses (through partial ownership or 100% control) and other deeply undervalued investments and turned a company that once financed socks for the Union Army into a diverse group of assets.

Leucadia scouts out businesses that the mainstream brokers rarely cover or understands. And they usually do it well. Since 1979, shareholders' equity (book value) has grown around 22% per nnum. This compares favourably to less than 10% per annum  for the S&P 500 and Leucadia's share price has compounded at 21%. Apart from last year!  For companies like Berkshire and Leucadia that invest in other businesses, book value is the standard way to track their performance.

Leucadia is likely to acquire new investments this year as Cummings and Steinberg scout out other struggling industries. This is how they can buy solid assets on the cheap. Their annual letter and company website have the touch of Buffett but unlike Waren Buffett, they don't host conference calls and their earnings announcements are bare-bones affairs. However, their annual report does provides loads of insights.

Many of Leucadia's businesses (metals, energy, land, financing) suffered hugely in 2008/2009, leading to unrealized losses of at least $432 million this year. But, the company's financial health remains very robust, with about $500 million in cash and short-term securities against $2 billion in reasonably priced debt that's not due for at least three years. On top of this, they have $2.1 billion of noncurrent investments that help counterbalance the debt load. The key thing to understand about Leucadia is that because it often invests in companies that lose money in the short term, it builds up operating losses it can use to offset against future taxable income. It's done this so often, in fact, that it now carries a $1.6 billion tax asset on its books (about 25% of its book value). So, this asset can be applied to future tax gains, allowing it to continue to pay zero  or very minimal  tax!

Leucadia's businesses may be  quite complex, but our investment reasoning is very simple: We believe we can buy into the smarts of Cummings and Steinberg now at a bargain-basement price. The stock is trading at 0.7 times book value, which is around historic lows.  So, we will be paying around book value for a management team that's highly skilled at seeking out distressed securities and turning them around to profitable ones. We believe that sooner or later - whether it's this year or next year, the investments that Cummings and Steinberg have made will start to pay off. Its a stock that should do well over the next five years.

Buffett has said that his whole job is to allocate capital among his various investments and operating units. The same goes for Ian Cummings and Joseph Steinberg at Leucadia, and they've built up quite a track record of doing this.

The "Baby Berkshire" looks good value at the moment. The stock has already moved off its 52 week low of $18to around $21. Anywhere below $25 it has value .

Buy Leucadia National (LUK:NYSE) up to $25.


Disclaimer: All the information above is provided as a service for individuals and institutions. It should in no way be construed as a recommendation as an investment. Investment decisions should be based on the risk tolerance and planning horizon of the investor. Market participants must understand that past performance is also not a guarantee or predictor of future results.