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LUK overvalued?


Josh4580
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From the last annual letter (http://www.leucadia.com/C&P%20Letters/C&P2008.pdf)

 

“Fortress Leucadia” is a draconian look into the future and a basis for defensive planning. It

assumes we will not make any more investments, continue watching our expenses, keep only

assets that are promising and slowly turn everything into cash which will be used first to retire

or pay down debt, while always maintaining at least $500 million in cash or liquid assets.

 

2Q Book Value is $15.53 and the stock currently trades around $25, or 1.61X book value. Given that they are in lock down mode and cannot really take advantage of the market opportunities, why is it trading at such a high multiple?

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Guest kawikaho

Definitely overvalued.  Besides, the latest quarter in earnings, I believe, is going to be a fluke based on the recent market rally.  I don't think it's likely LUK, and Berkshire for that matter, will post consistently huge upside in earnings going into next year.  Earnings will retreat to a lower and stable level.  I'd buy LUK when Cummings starts buying it.  He was a huge inside seller last year, and this was right before LUK started tanking.  I'm sure he knows the business and value of the company much better than anyone.  That was a clear indicator to me that it was not a good time to get into LUK.  Infact, he's been selling into the decline, and I don't see him buying it at the bottom.  So, he seems to be wary.  I think there are better value plays out there. 

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2Q Book Value is $15.53 and the stock currently trades around $25, or 1.61X book value. Given that they are in lock down mode and cannot really take advantage of the market opportunities, why is it trading at such a high multiple?

 

I think it's overvalued, and recently sold out of the rest of my position.  Now that I've done so the stock will of course double  :)

 

They have potentially a few billion of NOL's available if and when they start earning money in the future.  Overall, operations have been treading water for the past couple of years.  They wrote down quite a bit of the NOL value last year.  Personally I don't know how to value these, and have essentially neglected them when looking at the company.

 

Their investment in the Fortescue note is carried at a smaller valuation on their balance sheet than is the same liability on the Fortescue balance sheet.  Going from memory I believe the difference is about $1.5 billion.

 

So adding in something for the NOL's and a less conservative value on Fortescue you could add perhaps $2 to $3 billion dollars in shareholders equity, very roughly.

 

Still, cash-constrained as they are, it's difficult for me to see the margin of safety here.  LUK is always on my watchlist, the management is wonderful, and I will be intrigued if I see some insider buying again.

 

E

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Their investment in the Fortescue note is carried at a smaller valuation on their balance sheet than is the same liability on the Fortescue balance sheet.  Going from memory I believe the difference is about $1.5 billion.

 

 

I wonder how the lower prices just negotiated by the Chinese with Fortescue will affect the value of the note carried on LUK's balance sheet.  (See http://www.nytimes.com/reuters/2009/08/17/business/business-uk-china-steel.html)

 

Seems like a smart move on Fortescue's part to get on good terms with the Chinese government, since they will be ramping up production in the coming years.  It's hard to tell whether this is already reflected in the value of the note as carried on Fortescue's balance sheet.

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enoch01 gave a good overview of the true book value.

I'd say fairly valued at best.

Now they were bidding for some insurance assets along with BRK recently if my memory is correct.

I sold my position in the 25ish recently and started redeploying into SNS as I see better upside in the future.

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Representing the largest portion of my portfolio (69%), my opinion will probably be highly biased, so disregard as needed, however, it differs from the opinion of others in this thread. I think Leucadia is trading at about 1x-1.2x a reasonable estimate of the market value of its equity/investments. As such, it is neither cheap nor expensive, and I'm leaning in thinking it is more on the cheap side than the expensive side given the context of what may happen in the next decade. So...I'm continuing to add to my stake every month and as prices drop I will add more as cash-flow allows. The last thing on my mind is to sell a single share at these prices.

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This is my gift to the nonprofessional-quality shareholders on the board (of which I am one), i.e., those with a limited amount of time to spend on finding the really great investments:

 

Forgive me for just stating my bottom line on this after studying the company for the last 10+ years. It is not overvalued. Yes, it will double sooner than it will go down by half.  These guys are among the very few who run a company for the shareholders. They deserve what they are paid. They have on one occasion returned over 1/3 of the market capitalization to the shareholders in the form of a long-term capital gain distribution; in other words, when they cannot invest all of the cash to their satisfaction, they return the money to the shareholders.  They do sell some of their personal holdings in LUK when they feel that it is fairly valued.

 

On this one, it is worth your while to work a lot harder before you throw it out. Don't miss out on the joy of reading about shareholders of acquired companies suing their managements because they sold too cheaply to Leucadia.  This is a truly fun company and has made a nice amount of money for me. By the way, I cleaned up my portfolio and doubled down in the $10-13 range in March.  I would have gone all in at $5.  The NOLs are a red herring.

 

Good luck,

Tex

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Using Gretzky and hockey, those that believe it's overvalued are probably seeing where the "puck" is, but those that believe there's still value are seeing where the "puck" is going to be.

 

I'm sure that Cummings and Steinberg have a few more tricks up their sleeve before they're ready to call it a day. However, I'm happy indirectly holding it through FFH, ORH, etc.

 

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I'm sure investors last year would have liked to have known the puck was going to be 50% lower right now.  :P Just joking.

 

These guys are great investors, but there is a price at which anyone should be willing to pay for any business. Even Cumming sold quite a lot of stock in June 2008 for around $49/share (when it seemed overvalued) and a little at the end of last year around $15.50/share for whatever reasons. I didn't attend, but I recall reading notes that... at the 2005 Shareholder's meeting, Cumming said LUK's shares were overvalued during Q&A. He was asked again this last meeting, and responded with a no comment this time around.  I think LUK is neither very cheap nor overvalued at current prices. Another way of putting it is by saying that... if those two investors were not at the helm then I would say that it is slightly overvalued with current holdings.

 

~Long LUK

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A couple of points - my opinion is that I&J will neither be a big sellers or buyers of LUK stock for quite a while (i.e. nothing material), those watching their insider moves are likely to fool themselves into making (or not making) the wrong investment decision.

 

In retrospect, at $10/share LUK was a great bargain, similar to Wells Fargo at $8. In that time, companies were going belly up and even LUK had some discomfort, but except for some preferred conversion, did not dilute or get a major debt/margin call. I'm not sure if a few more weeks of those kind of prices would not have led to a plethora of failures around the country and world.

 

The "puck" is the economy and people's fears. That has moved substantially from Great Depression mode in March to something more balanced. My suspicion, and the reason I'm engaged in dollar-cost averaging even after the huge rise from the low, is that we may not see those numbers again, if we do, dollar cost averaging can't hurt too much, but if we don't, you'll have some more shares added to your nest egg at appealing prices.

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Guest kawikaho

I'm sure investors last year would have liked to have known the puck was going to be 50% lower right now.  :P Just joking.

 

 

Haha!

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Using Gretzky and hockey, those that believe it's overvalued are probably seeing where the "puck" is, but those that believe there's still value are seeing where the "puck" is going to be.

 

 

Don't forget that LUK has employed decent leverage to generate their returns.  Follow through your puck analogy - what leverage level do you think they will employ going forward?

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Don't forget that LUK has employed decent leverage to generate their returns.  Follow through your puck analogy - what leverage level do you think they will employ going forward?

 

Maybe their focus on "higher quality" businesses will offset the reduced leverage. Just a shot in the dark.

 

I'm sure investors last year would have liked to have known the puck was going to be 50% lower right now.  :P Just joking.

 

 

Haha!

 

I think the puck has been shot against the boards and took a sharp rebound. I don't really follow hockey.  ;)

 

Looking at the 10-K and recent 10-Q's, you can see that they issued over $350 million worth of shares in 2007 and 2008, so they were probably thinking it was overvalued then. Back in 2006, they issued under $4 million. So far, it's been under $200 thousand. So issuing shares have almost completely stopped. LUK may not be a bargain, but it can be argued that it's fairly valued. I don't know if you can say with any certainty that it's reached an extreme valuation.

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I would also argue that they are a bit undervalued based on:

 

- Price to Book of 1.6 versus 1.8 (5 year average)

- July boost  in stocks not taken into account in book.

- Quality of the Jockeys

- Vulture domain they operating on (and nowdays the pickings are plenty)

- Rather pessimistic sentiment regarding the stock

- and as mentionned they are not issuing new stock; a sign of not being considered overpriced by mgt.

 

I would not be surprised if they outperform in the coming few years.

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