Loews: Way Ahead of Estimates

 |  About: Loews Corporation (L)
by: Zacks Investment Research

Loews Corporation (L) reported third-quarter 2010 adjusted net income of 87 cents, strongly beating the Zacks Consensus Estimate of a loss of 1 cent. Results, however, fell short of $1.08 per share earned in the prior-year quarter. Adjusted net income was $364 million compared with $468 million in third-quarter 2009.

The decline in limited partnership income at CAN Financial, coupled with lower earnings at Diamond Offshore Drilling due to lower utilization and drilling suspension in the Gulf of Mexico led to the year-over-year decline in income.

Including a charge of $328 million in relation to the previously announced Loss Portfolio Transfer agreement under which the company’s CNA Financial Corporation subsidiary ceded legacy asbestos and environmental pollution liabilities to National Indemnity Company, net income in the quarter was $36 million, or 9 cents per share.

Total revenue at Loews in the quarter was $3.70 billion, down 1% from $3.74 billion in the prior-year quarter. Net Investment gains in the quarter were $62 million compared with net investment losses of $100 million in third-quarter 2009. Lower premiums, investment income and contract drilling revenues all resulted in the overall decline.

Total expense in the quarter increased 24% year over year to $3.4 billion. An increase in insurance claims as well as drilling expenses largely inflated the cost.

CNA Financial’s revenue declined 5.7% over the prior-year period to $2.3 billion in the quarter. Net loss attributable to Loews Corp. decreased to $140 million compared with a net income of $304 million in the prior-year quarter, reflecting CNA's transfer of legacy asbestos and environmental pollution liabilities to National Indemnity Company.

Diamond Offshore’s revenue dropped 9.4% year over year to $833 million. Earnings also plunged to $93 million from $170 million in the prior-year period.

HighMount Exploration revenue was $98 million, down 32% year over year. Reported earnings of $19 million were much lower than $40 million in the year-ago quarter, reflecting impairment charges.

However, Boardwalk Pipeline’s revenue increased 28% to $264 million from the prior-year level. Earnings improved significantly to $21 million, up from $9 million in third-quarter 2009.

Loews Hotels revenue increased 10% over the prior-year period to $74 million in the quarter. Segment loss improved to $2 million from a loss of $15 million in the prior-year quarter, as the latter included impairment charges related to the write-down of Loews Hotels' entire investment in a hotel property.

Book value as of September 30, 2010, was $45.31 per share, up from $43.53 as of June 30, 2010 and $39.76 as of December 31, 2009.

Share Repurchase
During the third quarter of 2010, Loews spent $84 million to buy back 2.3 million shares. During the first nine months of 2010, Loews bought back 9.2 million shares for $337 million.

Management intends to buy back shares of the company and its subsidiaries in the open market or otherwise depending on market conditions.

CNA Financial’s recent agreement with National Indemnity has helped it shed all its asbestos and environmental liabilities thus, imparting stability. Also, Boardwalk’s increased capacity and expansion projects and improved financial market conditions bode well. A strong balance sheet with low leverage and adequate cash are among other positives.

However, lower earnings at the operating subsidiaries, volatile natural gas and oil prices and a challenging economic environment keep us cautious. We maintain our “Neutral” recommendation on Loews over the long term. The quantitative Zacks #3 Rank (short-tem Hold rating) for the company indicates no clear directional pressure on the shares over the near term.