Barron's Bullish Leucadia National Feature Spot On

I like Andrew Bary's piece in Barron's on the merits of Leucadia National (symbol LUK in New York):

Run for 30 years by a secretive duo, Ian Cumming and Joseph Steinberg, Leucadia has invested in a wide variety of stocks and a diverse group of businesses. It has generated impressive returns and developed a cult-like following among value-oriented investors who like its investment style -- and results. Buffett is a fan of Leucadia, although Berkshire doesn't own the stock. Leucadia's book value, which stood at $23 a share on Sept. 30, is up from just 11 cents in 1979, an annual growth rate of more than 20%.

Further down:

Fans argue that Leucadia is oversold, noting that it rarely has traded below book in the past decade and in recent years typically has commanded 1.5 to two times book. The stock could hit $30 in the next year if the company's equity holdings turn around and if Steinberg and Cumming take advantage of the current financial distress to display their old stock-picking magic. Says one Leucadia holder: "I don't think that they suddenly took stupid pills." Given market declines since Sept. 30, Leucadia's book value has now probably fallen closer to $20 a share.

Still more:

Steinberg and Cumming, who couldn't be reached for comment, focus on minimizing Leucadia's tax bill. The company now has $1.6 billion of deferred tax assets, indicating that it expects to shield some $5 billion of future profits from federal income taxes. Strip out that tax asset to reflect no future gains, and estimated book falls to around $14 a share. "That's a worst-case assumption. You're not paying much above that for the stock," says a recent Leucadia investor.

Book value also may be understated because of conservative valuations for real estate and other assets the company owns, plus a potentially lucrative agreement with Fortescue that pays Leucadia 4% of net revenues from its Australian iron-ore mine for more than a decade. The deal could produce more than $100 million of annual profits for Leucadia, assuming ore prices don't collapse.

Smart management, strong balance sheet, stock price below book. Leucadia National is on my dance card of stocks to consider -- after more research. This is a company I've missed on several times over the years, like Capital Southwest (CSWC/NASDAQ). And seems a better buy than Barron's recent bullish piece on Berkshire Hathaway.

Comments

[Dennis Mangan]

The problem is that LUK isn't worth 1.5 to 2 times book (IMO, of course). A collection of assets run by a couple of guys, no matter how talented, has another name: an investment fund. And those ought to sell for book.

[valueguy]

If you really think LUK is such a great deal, I urge you to read the Value Investor's Club write-up and associated comments (many of them are private, I wish I could send them to you, but there are rules for the club). LUK may actually be worth more along the lines of $5/share than $30...

[2L]

valueguy, you beat me to it. LUK is poorly positioned. the barron's article was an amazing superficial analysis

[CONTROLLED GREED.com]

Dennis: Point taken, but might be worth considering if going for a decent discount to book.

valueguy & 2L: Perhaps I'll check out the club when time permits.

[2L]

The VIC member who posted the LUK short idea just destroyed the Barron's article.
"Such a blantant mistake . . ."
"This is terribly misleading . . ."

[John]

Might be a good idea for him to send a letter to Barron's, they often print letters from folks disagreeing with their articles.

[2L]

No reason to send it. What would the point of VIC be then?

[John]

Didn't say to send the VIC piece to Barron's, just a letter arguing Bary's article. No big deal.