Leucadia: Fools Rush In

Mar. 3.09 | About: Leucadia National (LUK)

In my last article on Leucadia (NYSE:LUK) I said “Cautious investors may prefer to wait until after the anticipated earnings announcement between 27-Feb and 6-March as any major disappointment would result in a short term sell-off.” If only I took my own advice I would have saved myself some pain! Fortunately, I was paid well for my puts and was cautious enough to only put (excuse my pun) myself on the hook for a third of a position. Still, the pain, the pain.

Leucadia announced its 2008 results after market closed on Friday and the market took the stock to the woodshed on Monday, down 19% or $2.76 to $11.87 on a horrendous day in the markets. The annual report is not yet available on the company’s website, but can be found here at the SEC.
Following are some key points:

  • Book value of $11.22 per share at December 31, 2008
  • AmeriCredit Corp. (ACF) investment of $405 million worth $249 million as of Dec 31.
  • Jefferies Group Inc. (JEF) investment of $794 million worth $683 million as of Dec 31.
  • The 277,986 thousand Fortescue [FMG.AX] shares had a market value of $377 million at Dec 31. LUK also owns a $100 million note in FMG.AX bearing interest of 4% net revenue with a maturity of August 2019. No payments have been made due to debt covenants.
  • Net operating loss [NOLs] of approximately $5,745,600,000 at Dec 31. “At December 31, 2008, the Company has recorded a valuation allowance against substantially all of the net deferred tax asset due to the uncertainty about its ability to generate future taxable income to utilize that asset.”
  • Year on year consolidated revenue down 6.42% or $74.2 million to $1,080.7 million.
  • Consolidated net income from continuing operations fell to a loss of $366.6 million from a loss of $57.1 million in 2007.
  • Consolidated assets fell $2,928.1 million or 36% to $5,198.5 million.
  • Income from continuing ops fell $3,060.1 million to a loss of $2,579.3 million, a loss of $11 per share. $1,672.1 million of the loss was due to the increase to deferred tax allowance.
  • The Parent’s only long-term cash requirement is to make principal payments on its long-term debt ($1,794,300,000 principal outstanding as of December 31, 2008), of which $475,000,000 is due in 2013, $221,100,000 is due in 2014, $500,000,000 is due in 2015, $500,000,000 is due in 2017 and $98,200,000 is due in 2027. The debt has interest rates of around 7-8%.

The figures are bad; considerably worse than I expected and LUK is still trading at a small premium to the year end book value. As Leucadia is geared to the economically sensitive assets, it is unlikely to trade at a premium to book in the near future. While the current price will more than likely appear attractive in a few years, investors should now stand aside to wait for accumulation of shares to provide a floor.

Disclosure: Short March Puts on LUK, i.e. long position.