Leucadia National LUK has had a mild bullish summer, but earnings came up short, while revenue beat projections this last quarter. With summer ending, the conglomerate is facing some headwinds going into the third quarter that may define the movement of the stock. Looking at these challenges, I am going to give my observations as to where I believe the stock is going.
These are the numbers for Leucadia National for the 2Q2012:
- Revenues of $2.14 billion compared to $753.44 million during the same quarter in 2011.
- It beat the average revenue estimate of $634.2 million.
- Net loss of $197.25 million or $(0.81) per share net income of $186.31 million or $0.76 for 2011.
- Fell short of the mean analyst estimate of 55 cents per share.
With a company like LUK, the gains and losses in securities play a major roll in revenue figures. It is very hard to create consistent earnings on the corporate level because of the diversity of holdings. And it is very diverse! This causes difficulties in creating financial statements and ratio analysis. We are talking: wine vineyards, plastics, and lumber, cattle and beef: Its just impossible! Analysts are expecting the stock to grow next quarter with an average estimate of 41 cents from 40 cents three months ago. The fiscal estimate also climbed from $1.58 per to share to $3.35.
The drought in the central part of the United States is another factor that could have negative impact upon earnings for LUK. Increasing costs of feed and damage to pasture lands are causing cattle herders to thin out their herds. The company is concerned that the price NBPC pays for cattle may go up more than the company can pass on costs to consumers for. This will also negatively impact profitability and taint the acquisition of Nation Beef Packaging Company that has added such a new diversity to the company's existing portfolio. In 2012 as it started its new beef processing services, it accounted for 89% of the company's second quarter revenue. But now it has to grapple with the rising cost of cattle which it has no control over.
From a bearish trend, the stock sprang out into a steady upward movement since it touched a low of 20 the first week of June. All summer it has slowly and steadily moved up. But, through general observations I can see that this is a consolidating phase, not a true movement on strength. If we look at the RSI indicator, we can observe that it has steadily remained around the '50' level without a pronounced move up or down. The same can be said about the MACD MA's as it has stayed around the '0' marker. Consolidating means there is a lack of strength in this move. Therefore we could be looking at a flag formation. This would be a bearish flag continuation pattern.
The bear flag pattern is found in a down-trending stock. This pattern is named for the resemblance of an inverted flag on a pole. The bear flag is a continuation pattern which only slightly retraces the decline preceding it. The resting period and slight retracement is narrow price action with a slight upward tilt or is horizontal (but no downward movement) with volume contracting during the flag portion of the pattern. The flag portion of the pattern has highs and lows which can be connected by small trend lines which are parallel, giving the flag portion the look of a small channel.
Nation Beef Packaging Company will struggle and this will affect revenue. If the proportions of revenue stay over balanced like they were this second quarter I do not believe the stock will continue to move up but the continuing bearish flag pattern will break down.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.