The Loews (NYSE:L) 2009 annual report surfaced on my desk last week. The title: Consistent VALUE Creation.
Last year's monochromatic graphs have been replaced by glossy pictures of traffic cones, drill bits, hard hats, wristwatches, and more. Apparently the investment world is still ignorant to the many changing faces of Loews. Beautifully stacked glasses of water further show cash ($3.03 billion) relative to debt ($870 million). A Swiss Army knife illustrates the different components of value and is entitled "Sum of the Parts". You can lead a horse to water...
Some stacking chairs show the dramatic decline in share outstanding, from 1.3 billion at year-end 1971 to 422 million in 2010... a 68 percent drop. A pile of sturdy stones, some cleverly arranged books, and tree ring sections (with no evidence of global warming) round out the visual parade.
You really can't blame these guys for trying. Loews takes the concept of a conglomerate discount to new highs... or is that lows?
Loews is a rarity: a provably undervalued company.
No need for long-term earnings projections or multiple expansion, just a working knowledge of basic math.
Loews holds stakes in 3 publicly traded companies: CNA Insurance (NYSE:CNA), Diamond Offshore (NYSE:DO), and Boardwalk Pipelines (NYSE:BWP). As of Tuesday's close, these holdings alone were worth $16.6 billion or $39.50 per Loews share. Yet the total market value of Loews is just $16.3 billion or $38.60 per share. So the non-public assets of Loews (aka "the stub") has a modestly negative value according to Mr. Market.
The stub contains the following assets:
- the Loews hotel chain
- HighMount Exploration and Production
- Boardwalk Pipeline General Partner
- CNA preferred shares
- Boardwalk Pipeline Class B Units
- Boardwalk Pipeline Subordinated Debt
And let's not forget the aforementioned $2.2 billion in NET cash.
One doesn't need a pocketknife to know that this list of assets is worth more than zero; certainly more than the current market value of negative $300 million. Even if one assigns a zero value to the non-cash assets, there is $5 a share in net cash that the market is overlooking.
Opinions will differ on the value of each individual non-public holding. That said, in aggregate, I believe the stub is worth at least $7 billion or $16.50 a share. Add the value of the public and non-publicly traded assets and it yields a conservative price target of $55 a share.
In a market where value is becoming harder to find, Loews is worth a look.
Given management's proven ability to effectively allocate capital over the years, it makes no sense for this company to trade at a discount to asset value, let alone one this steep. This is a conglomerate structure that works!
If the market continues to undervalue Loews, look for its management team to take decisive steps to close the valuation gap. Besides continued share repurchases, there could be a distribution of one or more of the public stakes. Distribute them all and Mr. Market would have to admit (at the very least) that the remaining stub has a positive value.
In the meantime, if the glossy pictures fail to educate investors, don't be surprised if the 2010 annual report is hand delivered by an IR rep and a complimentary multimedia presentation.
Disclosure: Long L.