Loews Remains Neutral as Earnings Face Pressure

| About: Loews Corporation (L)

We are retaining our Neutral rating on Loews Corporation (NYSE:L), as higher net investment income from limited partnerships, coupled with favorable net prior year development at CNA and improved results from the company’s trading portfolio were offset by net investment losses and lower earnings at Diamond Offshore Drilling due to lower utilization and drilling suspension in the Gulf of Mexico.

Loews Corporation reported fourth-quarter 2010 adjusted net income of $1.17 per share, beating the Zacks Consensus Estimate of $0.88 and substantially ahead of $0.83 in the prior-year quarter.

CNA Financial's agreement to transfer its legacy asbestos and pollution liabilities to National Indemnity, a subsidiary of Berkshire Hathaway (NYSE:BRK.A) will effectively eliminate CNA's asbestos and pollution reserve risk, as well as any reinsured dispute and credit risk, thereby reducing earnings volatility. Furthermore, it initiated a $0.10 per share quarterly dividend on the back of its strong capital position and solid insurance operations.

Loews maintains a strong and liquid balance sheet. Also it has traditionally indulged in buying back aggressively. In 2010, Loews bought back 11 million shares. Subsequently, during the fourth quarter, in January 2011, the company had spent $36 million to buy back 0.9 million shares. Loews also pays regular dividend.

Boardwalk Pipeline had a strong 2010 fourth quarter benefiting from increased available capacities and throughput from the pipeline expansion projects. Strong long-term demand for new pipeline capacity has created opportunities for expansion projects that yield high utilization rates from these new assets. We expect this increased capacity and pipeline expansion projects to support top line improvement in the coming quarters.

On the flip side, after several quarters of solid underwriting results, earnings started to face pressure as cost and market overhangs were experienced within the broader industry. These conditions continue to pressure premium, income levels and expense ratio. Until these issues are successfully managed, we see few catalysts for significant upside potential in the near term. Also, we expect limited top line growth, given the challenging operating environment at High Mount.

Results of Diamond Offshore were adversely affected by the US Gulf of Mexico drilling suspension. Moreover given the Deepwater Horizon Rig accident, Diamond’s contribution to Loews’ net income decreased by 28% from the prior year period. Thus we believe these operating headwinds will restrict revenue growth in the segment for some time.

Over the last 7 days as well as 30 days, none of the analysts covering the stock revised their estimates for the first quarter of 2011. Over the last 7 days as well as 30 days only 1 out of 2 analysts covering the stock nudged the estimates downward for 2011 and 2012.

The Zacks Consensus Estimate for first-quarter 2011 is 86 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $3.26 per share and $3.35 per share.

The quantitative Zacks #4 Rank (short term Sell rating) on the stock indicates downward pressure on the shares over the near term.

Headquartered in New York, Loews Corporation is a diversified holding company. The company’s principal subsidiaries are CNA Financial Corporation (NYSE:CNA), Diamond Offshore Drilling Inc. (NYSE:DO), Boardwalk Pipeline Partners LP (NYSE:BWP), Loews Hotels Holding Corporation and High Mount Exploration & Production LLC.