Loews - 23% Undervalued With Protected Downside

May.29.13 | About: Loews Corporation (L)

Loews (NYSE:L) is a conglomerate, which is an out of fashion type of business. However, it's trading for such an unbelievable price that buyers of its shares are getting significant value for free. It also has a Buffett-esque track record of compounding value for the long term. The Tisch family who founded and run Loews have proven to be excellent partners to their public shareholders, and share buybacks have been an important part of the return. They also form part of the catalyst here, as buybacks below fair value are accretive to stockholders and increase demand for the stock.

Boardwalk Pipelines

Loews owns a 53% interest in the limited partnership units of Boardwalk Pipeline Partners (NYSE:BWP), after they convert their 'B' units later this year. The stake in BWP limited partnership units has a current value of approximately $4.2 billion dollars, and provides Loews with cash dividends every quarter.

The general partnership interest in Boardwalk is also extremely valuable. Loews is currently receiving $10 million per quarter as the general partner of Boardwalk, an amount that will grow as Boardwalk's dividends grow. That makes the general partner an extremely valuable investment, because it is not responsible for any capital injections to the partnership. Capitalizing that at a 5% cashflow yield is very conservative, as many MLP general partners trade at higher valuations. That implies the current cash flow from the general partners are worth around $800 million. But as the infomercials say, "But wait, there's more!" Boardwalk is now over the maximum level in its incentive distribution rights plan, which means that the general partner gets 50% of every dollar added to the distributions. This means that inflation and business income growth will both accrue 50% to the general partner interest, giving it huge growth potential and justifying the high multiple.

CNA Financial

Loews also owns 90% of CNA Financial (NYSE:CNA), a property and casualty insurance company based in Chicago. At its current market cap that stake is worth $8.3 billion. Considering CNA Financial is trading at only 75% of its book value, this stake has room to appreciate further. Loews manages the investments of CNA Financial, and their track record as value investors is excellent. The portfolio is almost entirely fixed income and has a relatively short duration, so higher interest rates (which will happen eventually) are a potential catalyst.

Diamond Offshore

Diamond Offshore (NYSE:DO) is an offshore drilling contractor where Loews owns 50.4% of the stock. That stake has a value of $4.9 billion. Diamond has recently been paying a 75 cent per quarter dividend, and the offshore drilling industry has seen improving fundamentals and strong day rates.

So the total valuation of the three public subsidiaries is $18.2 billion, while the market capitalization of Loews is only $18.0 billion. Thus, a purchase of Loews is paying for the public subsidiaries, and getting the remaining assets for free. An enterprising investor or fund manager could also short out the equivalent amount of the public subsidiaries to remove stock price risk, and get the stub assets at no cost. While you might not be paying for the other assets they do have significant value.

Highmount Exploration & Production

Loews owns 100% of this natural gas producer. Even valuing its reserves at $1.00 per MCFE gives it a value of $825 million, which doesn't account for its undeveloped land and upside from potentially higher gas prices.

Hotels

Loews owns or operates 17 hotels and resorts in the North America under its own brand. It is refurbishing its New York location, and recently acquired the Loews Hollywood, which is being renovated. Loews hotels had $55 million of EBITDA in 2012, and $208 million in debt. A 10X EBITDA multiple gives an equity value of $340 million, which is likely understated considering the owned properties and potential value of the management contracts and brand.

Cash and Corporate Investments

Loews has liquidity of just over $3 billion net of corporate debt, which I value at $3 billion. They have been very good in the past about using this cash for accretive investments at the corporate or subsidiary level, and at using it for buybacks.

The $18 billion market cap of Loews is covered by its public investments, and other assets are worth around $4.2 billion. That means the company's current share price is approximately 23% undervalued at the present time. When the protection to the downside of the public subsidiaries' value is considered, this could be an excellent investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.