What Leucadia Sees In Jefferies Group And Mueller Industries

Includes: LUK, MLI
by: Brian Gorban

As I wrote in an earlier article here, Leucadia National (NYSE:LUK) has essentially been an investment fund since Ian Cumming and Joseph Steinberg took the helm in 1979. Since that time, these brilliant investment minds and largest shareholders have achieved nothing short of outstanding results. They have compounded book value by almost 20% annually for the time ending December 31, 2010 and raised the share price from a split-adjusted $.07 in 1979 to its year ending 2010 share price of $29.17, a 21.5% CAGR (compounded annual growth rate). That is an absolutely stunning 8.2% better annual return than the S&P 500 during those 31 years, which is among the top 1% of all investment managers globally. So when I see Leucadia having significant stakes in two companies, Jeffries Group (JEF) and Mueller Industries (NYSE:MLI), it gives me reason to take a closer look at those two and see if investors should buy as well.

Jefferies Group (JEF) together with its subsidiaries, operates as a securities and investment banking company. It has been volatile of late as some people have questioned how exposed they are to the European crisis. However, management has done an excellent job elucidating this misperception and even pointing out they are slightly short European exposure, so this looks to be more noise than substance. Moreover, Leucadia acquired another million shares on November 3 and another 500,000 shares on November 4, bringing its total ownership to more than 58 million shares or over 26% of the shares outstanding. Moreover, Leucadia co-founders Mr. Steinberg and Mr. Cumming matched those 1.5 million share buys on the same days, showing their strong belief in Jefferies as well. While I tend to stay away from financials that have had these questions swirl and cause irreparable damage, I'm willing to make an exception here as not only is Leucadia so well-respected, but it has the financial muscle to easily orchestrate a buyout for the remaining shares. Moreover, the stock trades at a cheap trailing and forward 7.5x P/E, .6x PEG, .9x P/S, and .8x P/B. I'd buy Jefferies at these levels or for the most astute investors, take advantage of the huge option premiums and sell the April 12 puts selling at $3.

Mueller Industries (MLI) manufactures copper, brass, plastic, and aluminum products. Leucadia already owns a massive approximately 10.5 million shares, good enough for approximately 27% of the shares outstanding. However, Leucadia and its co-founders made some sizeable purchases in the $43-$45 range back in September and now MLI is trading below $40. The company is decently priced at a trailing and forward 17x P/E, .6x P/S, .5x EV/S, and 1% dividend yield. The company has a great balance sheet with approximately $240M in net cash and just under $40 million in FCF this past year. I think this company has been performing real well in a depressed real estate industry and should only do better once that returns. I'd follow Leucadia and be a buyer here.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in JEF over the next 72 hours.