Loews (L) is a perennial value investor favorite, and often gets referred to as one of the mini-Berkshire Hathaway's (BRK.B) of the world. The company is and has remained cheap on a sum of parts basis for as long as I have know of its existence. And I continue to recommend it as a core holding because of this discount.
This family run company describes itself as a diversified holding company focused on building long-term value. For the last 50 years, Loews has put that identity into action, generating average returns of about 14% per year. The company was handed down from Larry Tisch, after his death in 2004, to his sons. Larry was a revered value investor, and his heirs are tasked not only with preserving the family business, but ultimately with putting their own stamp on what Loews can be. So far they are following in their father's footsteps of simple, conservative value investing.
Loews is comprised of five companies, three of which are publicly-traded. I love this because it makes valuing the company intuitive and rather easy. We basically have three baskets of value to access. The value of publicly-traded shares, cash and other investments, and non-public securities.
The first basket is the most straightforward. Loews Corporation owns about 242.4 million shares of insurer CNA Financial (CNA), about 70.1 million shares of offshore driller Diamond Offshore (DO), and about 120.7 million shares of pipeline operation Boardwalk Pipeline Partners (BWP). Added together, these assets are worth about $14 billion as of the market close on Friday the 14th of December, 2012.
Subtracting that value from the total market cap leaves you with about $2 billion for the rest of the enterprise. Let's take a look at what that extra $2 billion buys you. Loews' second basket of assets includes 22.9 million Boardwalk class B shares and $100 million of Boardwalk subordinated debt. In addition, Loews holds $3.8 billion in cash and investments at the holding company level. This is offset by $700 million in debt. Completely ignoring the value of the Boardwalk class B shares, the cash minus debt is another $3 billion dollars in value.
Loews Corp. currently has a market cap of 16 billion dollars. We have already demonstrated that the company has about $17 billion worth of publicly traded shares and net cash. We have not even discussed the third basket of wholly-owned subsidiaries. Those non-public securities include E&P gas company Highmount, the Loews Hotels and Resorts, and the Boardwalk Pipeline General Partnership. I assume they are worth something instead of nothing, and yet you can buy these assets in the open market for free.
Finally, we have yet to discuss the final piece of the value puzzle: management. The Loews Corporation have proven themselves to be fine stewards of capital. Since its public listing in 1971, the company has used share repurchases to reduce the number of shares outstanding by more than 70%, from a split-adjusted level of 1.3 billion shares down to today's 393 million. And of course they have also grown in value by double digits annually over the last 50 years or so. Buying a well-run company that continues to grow its net asset value ((NAV)), trading at a quantifiable discount, is a good buy in my mind.
Just like at Berkshire Hathaway, you need to break down the value of Loews into parts. You should think of this as two steps. First you have corporate earnings from wholly-owned subsidiaries which you can value like you would any publicly-traded company, as a multiple of EBITDA or on a EPS basis. Second you have an investment portfolio plus cash, which you can value at mark to market. Currently, Loews trades for the value of its investment portfolio alone, offering you a margin of safety in owning its non-public operations for free.
Taking the current share price of its public investments (about $36 per share), plus net cash (about $9 per share), and book value for its other investments (about $8 share), yields a net asset value of $53 per share. Loews currently trades at a 20% discount to book and closer to a 30% discount to NAV.
Yet the stock has consistently traded at similar discounts for years. I believe there are two reasons why. The first is what is known as the conglomerate discount, and the second has to do with the ease of replicating the portfolio.
There are several problems with conglomerates, and thus many investors feel that such companies deserve to trade at a discount. All of them are valid complaints and only trust in management ability and conviction in the value of the underlying operations will alleviate these concerns.
There are few if any synergies between unrelated businesses
The extra layers of management needed increase operating costs
The complexity of consolidated accounts can make it harder to analyze the overall company - and make it easier for poor management to hide things
Managers are very unlikely to have real expertise in all areas of the business
Fear of future investment mistakes
The second problem is more interesting. Loews' largest public holding is CNA, and that stock currently trades at 0.6 times book value. CNA has consistently underperformed its peers with poor underwriting performance and a flat stock price for the last ten years. The opportunity cost of having held CNA shares is immense, and the growth profile of Loews' overall portfolio is constantly being held back by this investment.
Furthermore, two of Loews' biggest operating segments are highly cyclical businesses, those being hotels and drilling. These operations result in lumpy returns, and quite frankly, I don't think either of the three divisions we've just discussed have any sort of economic moat to speak of. That just leaves the pipeline; but there are plenty of ways to invest in one of those, so who needs Loews?
As cash flows from the underlying businesses up to the holding company, a fortress like balance sheet continues to grow, with cash of $3.8 billion. This cash hoard gives the company the flexibility to make acquisitions, fund expansion or buy back its own shares. Loews is run by a shareholder-friendly management that continues to build great value over time. I have a great deal of confidence in the management's ability to allocate this cash to grow per share value. They have demonstrated a commitment to conservative, long-term oriented, focused value investing. James Tisch is a natural gas bull and that is why so much of the fund is invested in Highmount and Boardwalk Pipeline. He refuses to invest in anything less than his best ideas, choosing to repurchase shares rather than chase stock market performance.
The opportunity to buy a well run company, that continues to grow in value, at a quantifiable discount. This overrides any concerns I might have about a conglomerate discount or the recent performance of an insurance subsidiary purchased in 1974. This is why I continue to recommend Loews.
Cheap on sum of parts analysis
Quality portfolio of underlying businesses
Outstanding long-term management
Future investments will add value
Deserves the conglomerate discount
CNA is more of a liability than an asset
Can easily invest in publicly-traded securities you like while avoiding ones you don't
Mix of cyclical businesses does not offer an economic moat