Leucadia (NYSE:LUK) offers investors a wonderful opportunity to own a business where the sum of the parts are vastly worth more than whole. Shares which currently fetch $22 have not been at this price since 2004 when book value was around $10.50. In 2007, book value was $25 a share; after the pain in 2008, book value has come down to $11.22. Understanding this company reveals that BV won't stay there long nor will the share price.
The assets alone aren't the principal catalysts for this value creation. Rather, it's the leadership of longtime Chairman Ian Cumming and President Joseph Steinberg, brilliant capital allocators who, during 1979-2007, grew Leucadia's book value by a compounded annual growth rate of 17.3% while the stock price has appreciated by a CAGR of 21% versus 7.6 % for the S&P 500 with dividends included.
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A Mini Berkshire but with Greater Upside
Leucadia's holdings are quite eclectic. The company owns wineries in Napa Valley, a timber company in Idaho, an interest in the Hard Rock Café in Biloxi, a biopharmaceutical company and real estate, just to name a few. Detailing all of Leucadia's holdings is beyond the scope of this article. It widely considered a mini version of Berkshire Hathaway (NYSE:BRK.A, BRK.B) for both it breadth of businesses and the briliant capital allocation skills of management.
In any regard, an understanding of the company's major investments will be sufficient to reveal the long-term value of these assets and evident capital allocation skill of Cumming and Steinberg. Because the value of Leucadia is principally a conglomerate of different holdings, the short-term performance of the company will move in tandem with the volatility of the holdings. (For further reading, see Conglomerates: Cash cows Or Corporate Chaos? and Use Breakup Value To Find Undervalued Companies).)
Leucadia owns 9.9% of Fortescue Metals Group, an Australian iron ore producer. Leucadia paid $452 million for this stake. Because FMG is a publicly traded company on the Australian stock exchange we can easily determine its value. Currently shares of FMG trade at $2.62 or about $8 billion. This currently values Leucadia's stake at approximately $800 million. Last year the shares were as high as $13.
Some Valuable Pieces
Consider that if these shares reach $13 again, that would imply a value of about $40 billion for FMG, making Leucadia's stake worth $4 billion. Today the market cap of Leucadia is about $5 billion. If FMG shares only get to half of their 52-week high, that values Leucadia's stake at $2 billion. You can see the tremendous leverage in this asset alone.
In addition, Leucadia received a $100 million royalty note that matures in 2019 along with its equity investment in FMG at no additional cost. Get this: interest on the note is 4% of revenues (net of government royalties) on iron ore from a mine that has over one billion tons of reserves. The royalty payments alone could equal or exceed the entire cost basis of the investment by maturity.
Leucadia also owns approximately 30% of Jefferies (NYSE:JEF), an investment bank that has avoided government handouts - a stake that is now worth about $1.2 billion. It also owns 25% of AmeriCredit Corp (NYSE:ACF), an auto finance company, a stake worth over $400 million.
The Bottom Line
When the economy recovers these pieces alone are worth more than the entire value of the company today. Everything else - oil rigs, farmland, real estate, wineries, timber - is a free bonus. Clearly most of Leucadia's assets are tied to an economic recovery and until the economy really improves shares may be range bound. Along with the assets, the value is management and their impeccable 30-year track record. And today, these asset prices are at depressed levels with tremendous upside for Leucadia as the holder of those assets. (For more, see Economic Recovery: Get Ready.)
