Loews Corporation (L), run by the Tisch family, has often been compared to a baby Berkshire (BER) alongside Brookfield Asset Management (BAM) or Markel (MKL). The company owns outright or holds stakes in several companies, both public and private. Unlike a company that trades at a discount to its earnings power, Loews trades at a discount to its hard assets. As often seen with this type of corporate structure, a conglomerate discount is applied and the stock can look attractive on a sum-of-the-parts basis.
A brief summary of its holdings can be found here.
The company is well aware of the discount, which has been persistent over the years. The company is a perpetual buyer of its own stock on the open market, which takes advantage of the discount for the benefit of shareholders. From 2007 to the most recent quarter, just under 25% of the shares outstanding have been repurchased.
As for the unlisted components of the stock, the hotel portfolio is carried at book value, but the real estate values have grown immensely since their purchase. The natural gas acreage via the Highmount Exploration subsidiary has also shown promise, and JVs and purchases have been undertaken by others in the same field. There are also unlisted securities on the balance sheet: Cash, CNA preferred stock, Boardwalk (BWP) Class B units and some Boardwalk debt.
The stock has been featured in Barron’s, Value Investor’s Club, and numerous blogs that break down the figures. Depending on the figures and valuations, the stock is undervalued by 10-20% of its underlying assets without accounting for any future growth. I have very little to add from a quantitative analysis standpoint, but I have some ruminations about the discount and why it should close.
I would classify the conglomerate discount as being the result of two different types of structures. First is a holding company, where a parent holds stakes in companies. In such cases, GAAP earnings can be convoluted because the earnings do not actually pass up to the parent. From a real world perspective, the parent transitively benefits from the earnings being reinvested at the company level and increasing the value of the stake. The stock market does not seem to be a big fan of such a structure, as it inhibits realization of underlying value.
The other dynamic of conglomerate discounts seems to be companies with unrelated segments -- some boring, some sexy. Even though earnings go straight through the parent company, a discount is still applied because the earnings might not be optimally reinvested or a stagnant segment obscures an attractive one.
When I think of Loews, it falls vaguely under the former classification. At the same time, what is actually occurring at Loews is not typical of other holding companies. A lot of the earnings from BWP and Diamond Offshore Drilling (DO) make their way into the parent through dividends, which are fairly close to the earnings of those stakes due to the distribution policy of DO and the MLP structure of BWP.
Loews has acted responsibly in the past to minimize the tax implications of its moves to increase shareholder value. Stocks that have well-aligned managers have made for competent management in past investments of mine. The Lorillard (LO) spinoff was done in a way that resulted in no taxes being paid.
In the instance of the shares of BWP and DO, the way to fully realize their value is through receiving the dividend checks every quarter, as opposed to liquidating the holdings. The taxes on such a sale would be a big hit to the value of Loews, as the assets have appreciated significantly since their purchase. So for the very reason that I suspect the market is applying a discount to net asset value of the company, I am inclined to fairly value them, as the status quo is resulting in the full realization of their value. If Loews were to get rid of the shares, it would most likely be through a tax-free mechanism, and in the meantime they are maximizing the value better than the market understands.
The crucial factor to recognize, other than the one just stated, is that Loews has consistently increased its value over time. Repurchasing its shares at a discount is additional gravy on top of the discount, because it only widens the disparity of per share value and price. That the price has not followed, or that the discount has existed in the past, bears little relevance to the ultimate value of the company. Unlike some other speculative stocks I have looked at, Loews possesses all the characteristics of a solid investment. The company’s actions have consistently exhibited all the characteristics of excellent capital allocation and maximization of shareholder value, and patient investors will be rewarded.
Disclosure: I am long L.