by Lawrence Meyers | September 18, 2012 10:40 am
The trick to becoming a successful conglomerate is for management to buy up businesses that actually are successful, rather than attempt to diversify some core business by expanding into an unrelated area (Peter Lynch called this “diworseification”).
The challenge in writing this week’s article is that there are so many terrific conglomerates, and few I’d really want to sell if I held them.
Take General Electric (NYSE:GE). It continues to rock ‘n’ roll, year after year, growing at 9% to 12%, generating tons of cash flow and paying out a reliable dividend. You’d never know just how many businesses it owns unless you really dug deep.
The same goes for 3M (NYSE:MMM), which has its hands in everything you can imagine — hands that stretch to the furthest reaches of the globe, pumping out billions of free cash flow every year.
Yet there remains one conglomerate that rarely gets the love it deserve from Wall Street or retail investors, and that is Leucadia National Corporation (NYSE:LUK).
Leucadia has been around for more than 30 years, and has an incredible slate of portfolio companies, including: Sangart (91%), Berkadia Commercial Mortgage (50%), HomeFed (31.4%), Conwed Plastics, Idaho Timber, Keen Energy Services, ResortQuest, Crimson Wine Group, Leucadia Energy, Jeffries and Company (29%), Inmet Mining (9.98%) and Fortescue Metals Group (9%).
Some are publicly held, allowing Leucadia the flexibility to increase liquidity by selling pieces in the open market. Cash flow is not generally an issue, though — its businesses do quite well in this area. With regards to Berkadia, this is a joint venture with Berkshire Hathaway (NYSE:BRK.A, BRK.B), so you get Warren Buffett’s seal of approval.
Finally, Chairman Ian Cumming and President Joseph Steinberg have been with Leucadia for more than 30 years and combined own 8% of the company’s stock, putting their money where their mouths are.
Investors should be aware that Leucadia’s profit and loss statement is not the thing to pay as much attention to as its cash flow statement. The P&L is always important, but you want to see if the individual holdings are pumping out cash. That’s the true measure of a company’s value and, of course, provides Leucadia with cash to make further acquisitions.
Leucadia’s stock sits at $23, well off its pre-financial crisis high of $54. As with Liberty Media (NASDAQ:LMCA), Wall Street will take a long time to truly understand this company’s value, but when it does, your investment will be rewarded.
On the other side, I’m bearish on United Technologies (NYSE:UTX).
The economy is not recovering as much as I had hoped for when I suggested the company was a buy last year for regular accounts and a hold for retirement accounts. The conglomerate is manufacturing-heavy, and that sector isn’t exactly rolling along.
United Technologies’ earnings are now expected to be flat this year, then rise 20% next year, with 10% annualized earnings after that. If you add in the 2.6% yield, and put a 13 multiple on next year’s earnings, you get $81, which is right where the stock is trading. The problem is that this means UTX is trading on December 2013’s earnings, and if the economy should stumble, these estimates will be taken down — and the stock along with it.
I think it’s time to bail on United Technologies and go with Leucadia instead.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.
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