One of the stocks I’ve followed, and occasionally owned, almost since I began investing has been Leucadia National Corporation (LUK).
What I find most interesting about Leucadia is that it takes the same approach that Warren Buffett does with Berkshire Hathaway (BRK.B) — and, for that matter, what John Malone pursues with his oft-restructured Liberty Media Corporation (LMCA).
That is, LUK stock is a collection of business that the management has purchased during the company’s 30-plus years in existence. Yet for some reason, the market has never rewarded it in the same way its peers have been over the years.
It has taken Malone’s operation a long time to be properly recognized by Wall Street. Maybe Leucadia is overdue.
I haven’t checked in on Leucadia’s holdings, many of which are publicly held, in quite some time. But I’m blown away by the list.
First of all, Leucadia merged with investment bank Jefferies Group, which brought a lot of balance sheet support and expertise to the table. Beyond that, the entity now owns 79% of National Beef (fourth-largest U.S. beef processor), 50% interest in Berkadia (co-venture with Berkshire in real-estate driven lending operation), Garcadia (the 15th largest U.S. auto dealership group), The Hard Rock Biloxi, Conwed Plastics, Idaho Timber, Italy-based start-up wireless broadband company Linkem, and HomeFed Corporation (real estate developer).
Leucadia is more active in liquidity events than Berkshire, as it sells its holdings from time to time. Recent events have generated more than $2 billion for LUK stock, including a Fortescue Metals note redemption and stock sale in 2012 for $868 million; a Inmet Mining merger payment of $732 million including about $340 million in acquirer Quantum stock; a Mueller Industries (MLI) stock sale of $427 million, a sale of Keen Energy for $128 million, and the sale of TeleBarbados for $28 million.
LUK stock has always had a solid balance sheet. With Jefferies added to the group, the company now has $27 billion in cash and short-term investments, and $8 billion in long-term debt. Outside of Jeffries, LUK stock generated $299 million in operating cash flow in FY12 and $228 million in FY13.
There’s really no great way to assess the value of LUK stock. I’ve always focused on the company’s cash position, cash flow and how the individual portfolio companies perform. With LMCA, you just had be patient as a long-term investor, and that patience has been rewarded. I think the same is true of Leucadia.
John Malone tends to buy companies and hold them. He will buy and sell the stakes of public entities he gets his hands on, as he is able to directly monetize those assets. He usually manages to sell those assets, however, in a trade — taking on an equivalent position in a new entity in order to avoid taxation.
Leucadia isn’t quite as sophisticated.
My view of LUK stock? Historically, Leucadia became volatile in mid-2006 and has remained that way. Looking at the chart, I would wait for it to fall back toward $20, then buy a stake to cut up into two pieces.
The first piece I would hold for the long term, hoping one day the market recognizes the long-term value of the company as with Liberty.
The second I would use to trade, selling at various points up the price scale as you see fit.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets at @ichabodscranium.
