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Follows value investing philosopy, CFA charterholder
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  • Comments On: "Loews Corporation: An Underperforming Conglomerate In Search Of An Activist"

    The following article by Blue Ridge Buffettologist was recently posted on Seeking Alpha:

    The article discusses negative issues surrounding Loews Corporation and suggests that the company is undervalued and could benefit from the presence of an activist investor. My comments on the article are as follows:

    Great article! You have made some great points highlighting why Loews has performed so poorly in recent years and what could potentially be done about it. I recently initiated a position in Loews when it was bouncing around its 52-week low, so I appreciate the opportunity to read a well-researched article with which to compare my own views.

    You are correct in pointing out that Loews has traded at a discount to the sum of its parts (market value of DO, CNA and BWP and book value of cash/securities, HM, and the hotels) for several years. This discount began to show up after the financial crisis and I think it could be attributable to several things you mentioned including investors' growing lack of confidence in management. I think it could also have something to do with the divestiture of Lorillard as after that Loews was much less diversified and received less in annual dividends. Also, I believe with the discount the market was expressing its belief that the book value of HM was overstated; which proved to be true of course. On a positive note, while the discount has remained fairly stable over time, net cash and securities has made up a larger percentage of the Loews's "stub" as the cash pile has grown and HM has been written down. I believe this should lead to a narrowing of the discount in the future, especially after HM is sold and the net proceeds hits the balance sheet as cash. A note on HM: like you wrote, the net book value of as of Q2 was $778 million. And in the Q, management indicated that HM has been marked to fair value based on the progress of the auction for HM at that time. So, as the auction to HM was very nearly concluded at that time, I believe it is safe to assume that the ultimate net proceeds from the sale of HM will approximate the nearly $800 million in net book value, which will increase Loews's cash balance.

    You make valid points regarding the excessive expenses associated with Loews's corporate headquarters, especially in light of the stocks poor performance of the past several years. It is difficult to believe that such large numbers of staff are necessary to run a holding company, even with the substantial investment portfolio the company manages. Many others manage a lot more with much less staff and expenses. You also make valid points regarding the incredibly poor results earned by the corporate investment portfolio the past couple of years. Based on the 2013 10-K, the value of the Loews's "Investments in securities" portfolio was $1.330 billion compared to $1.332 billion at the end of 2012 (Page 189 of 2013 10-K). The $1.33 billion ties to the value indicated in the company's 13F filings. Considering the huge gains in the S&P 500 in 2013, it is beyond comprehension that Loews's stock portfolio could have essentially been flat on the year. How is this possible? Well, as you pointed out, it appears Loews made a huge bet on gold and precious metal mining equities, which got absolutely killed last year. Many mining stocks fell over 50% (or much more) during 2013 and gold fell sharply as well. As of the most recent 13F, Loews still had nearly 25% of its stock portfolio in precious metals investments. I didn't go back and calculate this as of 12/31/2012.

    It is somewhat troubling that people who go to so much trouble to hold themselves out as value investors in their annual reports have taken such large positions in precious metals. I have nothing against gold but it has typically not been embraced by the value investing community given that it is impossible to value. I believe that most value investors probably agree with Mr. Buffett's description of gold as spelled out in the annual letter a couple of years ago. Mr. Tisch's repeated comments on how the poor economic outlook prevented him from making investments in the aftermath of the financial crisis also does not comport with the mindset of most value investors, as they typically try not to let their macroeconomic views influence their investing. Given the investments in precious metals and the reluctance to act after the crisis, the folks running Loews appear more macro investors than value investors. I believe the failure to take advantage of the aftermath of the financial crisis is part of the reason for the discount.
    However, in spite of these negative factors and the other that you mentioned, I just bought the stock. I bought it because the stock is very cheap and it seems like the most of the bad news in priced in and then some. Frankly, it seems that nearly every decision management has made recently has gone as badly as possible, so how much worse can things get? First, Loews pays $4 billion for HM and then watches the value of the company subsequently collapse, CNA consistently underperforms, BWP earlier this year fell 40% in a day when it cut its distribution (primarily due to the fact that its main pipe takes gas the wrong direction now given the booming production from the Marcellus and Utica shale), DO has collapsed in price from where it was trading just a couple of years ago, and the company's equity trading portfolio hasn't many any money during one of the biggest market rallies of all time! So, how much worse can things get? Has management lost it or are they just going through a rough patch?

    One huge positive is that now HM is gone and off the books. The major write-offs of HM have prevented Loews's book value from growing much over the past few years. So, now with HM gone, book value per share will resume its ascent. Also, with the cash proceeds from HM, net cash and securities now equals nearly 25% of the market cap of Loews! And like I said before, seems to me that with cash and securities making up a greater percentage of the "stub" than before, especially now that HM is gone, the discount may narrow.

    Next, I think CNA has been performing a little bit better than you give it credit for. A few years ago a new CEO was brought in who was previously a vice-chairman and the COO at Chubb, Thomas Motamed, and things have been improving. For example, CNA has made an underwriting profit in four out of the past five years. The stock price has started to reflect this. CNA paid a substantial special dividend to Loews earlier this year. A five year stock chart versus Travelers and Chubb looks much better than the 30 year chart you show. Had it not been for the relatively strong performance of CNA in 2013, Loews stock would have performed much more poorly than it did. Regarding BWP, it has already fallen off a cliff and blown up so how much worse can it get? In reality, BWP appears very undervalued currently at it is trading at a near 10% free cash flow yield on depressed cash flows and the company is taking steps to ensure its long-run viability. I believe DO is very inexpensive as well and we seem to be near the low point in the cyclical offshore drilling industry. With several new rigs coming online in the next couple of years, DO's revenues and profits should grow in the coming years.

    Almost unbelievably, given the disaster that was HM, Loews's book value per share has still grown at a 10% CAGR over the past decade. And now with HM gone, that growth will resume. This is a potential catalyst. The growth in book value over the past decade has largely been possible due to stock buybacks. Given that Loews is trading so cheaply and at a discount to the sum of its parts, I expect management to continue and maybe buyback increasing amounts of stock over the next couple of years. This is one thing they have done right. So with reduced shares and a growing book value on an absolute basis, the stock is set up to potentially do well and reverse its poor performance over the past 2.5 years. Also, given Loews's low enterprise value (market cap less net cash), it is set to receive dividends from its subsidiaries that amounts to nearly 6% of enterprise value this calendar year (assuming DO doesn't reduce its special dividend).
    You have done a fantastic job pointing out real problems with Loews. And if I had owned the stock for the past few years, I would be past the point of exasperation, if I hadn't already sold the stock. However, I believe all the problems and huge recent disappointments have created a great opportunity to buy a collection of assets for a very attractive price. Maybe right now is the point of maximum pessimism regarding Loews? Who knows, maybe at some point in time management can make a few good decisions. Even a blind squirrel finds an occasional nut.

    Tags: L
    Aug 29 4:38 PM | Link | Comment!
  • Money For Nothing, Silver For Free

    Silver Standard Resources (NASDAQ:SSRI) has an unreasonably low valuation. The company currently has one silver mine, Pirquitas, located in Argentina (which is one of the largest in the Americas) and it has two advanced stage development projects, one in Peru and the other Mexico. The silver resource base of its eleven total properties is the largest of the publicly-traded primary silver producers. Its proven and probable silver reserves total 189 million, measured and inferred resources total 1.1+ billion, and total resources including inferred resources total nearly 1.7 billion ounces. The company also has zinc and gold resources. The stock, currently priced near $13.75, is 62% below its 52-week high.

    While I do believe there are serious potential consequences for the future of the U.S. Dollar given the money printing and accumulation of massive debts in recent years, the risks of these various disaster scenarios playing out is not the reason why I believe SSRI is a good investment. The dollar doesn't have to crash, interest rates don't have to skyrocket, nor does silver need to explode higher for an investment in SSRI to payoff. In my view, the value place on the company by the market is just unreasonably low given circumstances today. But if some of these "tail risk" events do come to pass, then with its huge physical asset base, SSRI should provide investors with a means to preserve their wealth, which is an added bonus.

    Why is the market ascribing SSRI a low valuation? I believe there are several reasons for this: a.) the silver price is extremely volatile and there is skepticism regarding the sustainability of current prices, b.) its only operating mine, Pirquitas, has had some operational hiccups since ramping up in 2010, c.) Pirquitas is located in Argentina, which is a questionable business environment to say the least, d.) an economic slowdown in China is weighing on many commodity producers, e.) overall sentiment in the precious metal mining sector is very low currently, and f.) investors have not recognized the hidden value on SSRI's balance sheet.

    What is SSRI worth? As the company only has one operating mine, the company's value is best represented in its assets rather than its current cash flows. As of December 31, 2011, SSRI's book value was approximately $1.05 billion. However, SSRI owns 18.9 shares of a company called Pretivm Resources (NYSE:PVG) currently worth over $295 million. But because this asset is accounted for using the equity method on SSRI's balance sheet, its value must be adjusted upwards by $195 million to reflect market value. After making two additional adjustment (netting out deferred tax assets and liabilities and assuming the value of an $89 million tax receivable from the Argentine government is worthless) the adjusted book value comes to $1.12 billion, which compares to a market capitalization of $1.11 billion (the company is trading for 1x adjusted book value). Is this reasonable?

    Trading for 1x adjusted book value doesn't necessarily mean that SSRI is cheap; however, when its individual assets are examined, it is clear the market is ascribing minimal value to its resource base. First, the company has nearly $400 million in cash (this assumes the cash balance as of December 31, plus $70 million the company received from Pretivm warrants subsequent to year end), $295 million in Pretivm stock, an additional $33.5 million in marketable securities (primarily Kingsgate Consolidated related to the sale of a property to Kingsgate), and a $5 million receivable due from Kingsgate in 2012. In other words, the value of SSRI's cash and securities exceed $733 billion, which accounts for 65% of its adjusted book value!

    In addition to its cash and securities, SSRI owns one operating silver mine located in Argentina. Pirquitas has an operational mine life of 6.5 years, 84 million ounces of silver reserves, and 224 million lbs of zinc reserves. For 2012, the mine is projected to produce between 8.2 and 8.5 million ounces of silver. Assuming a silver price of $30, Pirquitas should produce at least $50 million in free cash flow annually for the next several years. What is Pirquitas worth? According to SSRI's 2009 annual SEC filing, it cost approximately $333 million to construct, including pre-construction costs. Because discounted cash flow models are subject to significant uncertainty, I will conservatively assume that Pirquitas is worth $300 million, which is less than historical cost (a value higher than this is easily reached with conservative assumptions using a DCF). With cash and securities of $733 million and assuming Pirquitas is worth $300 million, the market is valuing all the remaining equity (ten resource properties with over 1.1 billion ounces of silver proven and probable reserves and measured and indicated resources) of the company for literally next to nothing! As SSRI has about $125 million in debt, an investor would have to pay roughly $1.24 billion to purchase the entire company. Considering that in doing so, an investor would receive nearly $1.03 billion in cash, securities, and an operating silver mine, the remaining proven and probable and measured and indicated silver resources could be purchased for less than $.20 per ounce. At a stock price of around $11.25 and holding the value of SSRI's securities portfolio at current levels, the silver in the ground is free (so maybe the "maximum" downside is 18% assuming a starting stock price of $13.75).

    What is SSRI worth? This is difficult question to answer. It is much easier to determine it is undervalued rather than to precisely estimate intrinsic value, especially considering the company sells a commodity. However, one good indication may be the prices at which SSRI has carried out transactions in the past. I won't go into the details, but over the past couple years, SSRI liquidated two silver properties (Bowdens and Silvertip) and consolidated its holdings in another (San Luis). When these transactions are examined, they reveal similar multiples being paid for resources in the ground, which average (either reserves or measured and indicated resources, not including inferred resources) to around $1 per ounce (and keep in mind these transactions were carried out when silver was trading at much lower prices). Using this multiple and adding cash/securities and the assumed value of Pirquitas, SSRI is worth roughly $25/share (80-90% upside). Of course, not every ounce in the ground will be mined. Some properties will turn out to be uneconomical and/or the silver price might fall dramatically. Or, SSRI might waste its huge cash hoard by investing in projects that don't pan out or its marketable securities may plummet in value (SSRI's securities portfolio is not diversified to say the least)……the list is numerous. These are all legitimate risks and must be considered. However, in my view the market is discounting these risks and then some. At a price around $13.75, SSRI provides investors with a large margin of safety, strong potential for gains, and very cheap "tail risk" protection via exposure to precious metals in environments of inflation and/or currency debasement.

    Disclosure: I am long SSRI.

    Additional disclosure: This article is provided for informational purposes only and should not be considered an offer or recommendation to buy or sell any security. The information contained herein is obtained from sources that are believed to be reliable, but no guarantee is made for accuracy.

    Tags: SSRI
    Apr 23 9:21 AM | Link | Comment!
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