For my student-fund class this semester, I was required to pitch a ‘special situation’ investment, a broad category that encompasses pairs trades, merger arbitrage, liquidations, etc.
Unfortunately, most of my current ideas in this space were disallowed due to market cap restrictions and other covenants in our school’s IPS, so I pitched a trade based on the ‘stub’ portion of Loews Corporation (L), a holding company run by the Tisch family.
The prices in the presentation are from a week or two ago but the story hasn’t changed much, as the current stub is valued at only ~$1.87/share for assets worth up to $19 or $20 per share.
However, the stub trade is volatile and expensive from a carrying cost perspective – in the end, I suggested a straight buy on the equity. The fact that management has compounded book value at 16% annually for fifty years is pretty impressive stuff.
Google Docs Link: Loews – Investment Pitch
[scribd id=91784090 key=key-2azlhh6ufvkpy6ljte0h mode=list]
A few other write-ups on Loews:
http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/33572
http://www.rationalwalk.com/?p=12522
Disclosure
No position
Greetings!
I’m a long-time reader, fellow value investor and former online poker grinder. I’ve read about the Loews stub situation off and on for a while, but I was always more curious about the historic range of the stub value. I’ve heard in the past it’s even been negative. Would you be interested in a joint research project to figure out where the stub has traded in the past?
I’ve gone back and tried to calculate historical stub values, but it becomes more complicated prior to 2008 due to the Lorrilard spin-off (a somewhat complicated transaction due to the tracking nature of the Carolina Group stock, and designed to ensure tax-free status of the transaction for Loews shareholders).
The stub did reach negative values during the middle of the financial crisis, with a low near negative -$830mm and trading over $2B several times in 2010 and 2011. However, this analysis is a bit simplified, as I assumed a constant ownership % for each of the public subsidiaries, which is unlikely to be the case (especially due to some transactions in BWP over the past several years).
To me, I’m comfortable knowing that the stub assets are worth substantially more than the current market price – with the Tisch family’s long-term view and proven track record, I think that value will be realized eventually in some form or fashion.
How do you make such nice charts and tables?
Thanks for the compliment! Not sure exactly which charts you are referring to though… I create many of the charts in Excel, along with using Powerpoint to design and layout the slides. However, I do pull quite a bit of information from company’s annual reports, investor presentations, fact sheets, etc. as their design skills are much better than mine!
Nice analysis on Loewe’s. I agree with most of it.
What are your thoughts on a catalyst to achieve the valuation you determined? The average 3 year discount to NAV is approximated to be 26.5%. Given the economic environment, the discount to NAV or SOTP does not surprise me.
It would be great to hear your perspective.
Xavier,
I’ve found it difficult to accurately track the discount to NAV over the long-term. Is the 26.5% figure including public + private + cash? And if so, are you using a standardized valuation method for the private subsidiaries?
The value of the private subsidiaries changes over time – obviously HighMount’s value will deteriorate if natural gas prices continue to stay low or fall even further. That’s why I find it helpful to look at the implied value of the entire stub, and just compare whether the market is accurately assigning the value to the holding company assets (clearly the market is not, but the actual amount of mispricing can be debated).
Most studies I’ve seen show that conglomerates often trade at an average discount of 15% from the SOTP. With such a premium long-term track record and history of unlocking shareholder value, I’d argue that Loews should trade closer to SOTP, but even so, a discount of 30%+ is overdone despite the economic environment.
As far as catalysts, I’d see continued and aggressive share buybacks as one method to sustain or possibly close the current price gap. In addition, ANY reversal of the huge bearish sentiment on natural gas would cause a re-rating of the HighMount assets and boost the implied market value of the Loews stub in relation to NAV. Management has clearly acknowledged the price/valuation discrepancy, and I’d count on them – given their track record – to do what is best for shareholders.
The 26.5% does come from public + private + net cash. Also, I looked at one of your sources in your presentation, Morgan Stanley.In their latest report, their estimates indicated the 3-year range around 26.5%. However, they also indicated that this value is currently 100bps inside the average. Not to say the market and MS always know what they are doing, but this is a positive trend to your point if it continues.
Fair point on the stub value. For the most part, I agree with you on the it. SOTP is a tricky game because the underlying value of the stub may go higher, but the other parts of the business may go lower due to external factors. In this case, the comparable analysis performed did show that the companies were under-to-fairly valued on a multiple perspective, providing more comfort on that stub value.
The margin of safety here does provide comfort that the 30%+ is overdone.
Thanks for the response. Btw, are you invested in this idea? Or was it just for class?
Cheers
I looked over the MS report again, and they do provide a haircut on the DO subsidiary value due to tax leakage. This isn’t the case for CNA or BWP, and I couldn’t find any information on why this might be the case (since DO is majority-owned). This is probably why they are showing a slightly lower discount than I’m calculating.
Loews management has come up with creative ways in the past to avoid tax hits (see the Lorillard spin-off as an example), so maybe they can do the same for DO – in any case, I don’t think they’ll be selling off any of the subsidiaries anytime soon.
I don’t own Loews in my personal account, but that’s only because I’m still finding some compelling values in the small and microcap space. If those dry up (and I’m having a harder time finding such ideas lately..), I’d consider Loews as a stable, long-term holding that will likely beat the market.
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