Invest in the Investors: LUK Leucadia National Corporation

I'm attracted to holding companies that are:

1. trading below book value
2. have management with "skin in the game" (significant insider ownership) and a long term track record
3. little or manageable debt

I've admired Leucadia for a long time but much like BAM, held off actually owning shares because of inflated valuations. This clearly is no longer the case.



Run by gifted mavericks Ian Cumming and Joseph Steinberg, Leucadia National corp is an eclectic, diversifed holding company that was founded over 150 years ago. Its investment portfolio is quite focused and includes small cap biotechs, wineries, copper mines and boutique investment banks. They are deep value investors with a penchant for the "cigar butt" approach. To quote the duo in a shareholder's letter:

“We tend to be buyers of assets and companies that are troubled or out of favor and as a result are selling substantially below the values which we believe are there. From time to time, we sell parts of these operations when prices available in the market reach what we believe to be advantageous levels.”


Bull Case for LUK

• masterful capital allocation has produced a 21.4% CAGR increase in book value/share since 1979!
• average ROE is 21% over 29 years
• being mid cap (5 B) has allowed it to outperform Berkshire Hathaway's stock over the last 20 yrs
• high insider ownership. Steinberg and Cumming each own 13% of the outstanding shares.
• high degree of guru ownership, with many recently increasing their stakes including Bruce Berkowitz, Tom Gayner and David Winters.
• Mr. Steinberg and Mr. Cumming have signed a 10 year contract to stay with the company and in the last AGM they said they would work there as long as they physically could. Apparently they are both in excellent health.
• historically trades at 2 x book value, currently trading at 0.7
• plenty of liquidity current ratio> 3
• mostly long term debt with a low D:E ratio v.s. peers of 0.29 and leverage ratio of 1.38.
• currently P/E ratio 10 x P/B 0.7 = 7 (far below Ben Graham's 22 criteria)
• using an aggregate sum-of-the-parts, P/B value analysis and DCF analysis, they came up with a FMV of about $40/share roughly double what the shares are currently trading at.
  

Bear Case for LUK

• shareholders need to rely on the expertise of only 2 aging individuals as the company is a specialist in picking unprofitable and troubled investments and fixing them up as opposed to Buffett's strategy of picking wonderful businesses that essentially run themselves, with or without him
• heavy exposure to commodities and overseas ones to boot. These will suffer in the global slowdown and may well not survive
• a concentrated portfolio magnifies bad investment decisions as well as good ones
  
• recent heavy investment in JEF, a small investment bank they bailed out of trouble. It may have a rough run before the credit squeeze runs its course.
• LUK's assets under management has shrunk by almost half (9 B-->5.3B) since Jan 2008 due to dwindling valuations
• as the company grows, it will likely grow more slowly due to more competition for distressed potential investments and the law of large numbers
• dividend yield is very modest at 1%; however, the managers are considering increasing this
  

IMHO, this is an excellent long term opportunity to own a company with a superb track record at an affordable price. It would be appropriate for a 3+ year time horizon in an RRSP.

I've put in a low ball bid at $19/share and hope it gets filled on a really nasty day in the stockmarket!