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Comments On: "Loews Corporation: An Underperforming Conglomerate In Search Of An Activist"

|Includes:Loews Corporation (L)

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.

Disclosure: The author is long L.

Stocks: L