While we prefer private company investments, any such investment is compared to our best opportunity among publicly traded stocks. Who might that be, in this pricey market? Leucadia National.
Overview: Leucadia is a conglomerate, built over decades by Joe Steinberg and Ian Cumming, who retired in 2012 by merging Leucadia with an investment bank called Jeffries. Joe & Ian believed that the executives at Jeffries–Rich Handler and Brian Friedman–would be effective stewards of their legacy.
Leucadia’s largest business is Jefferies. They also own an asset management company; a large loan servicing operation (called Berkadia, a partnership with Berkshire Hathway); the country’s third largest beef processing operation; real estate; car dealerships; even a cable operator in Italy. Leucadia currently is investing aggressively in oil & gas, particularly in the Bakken.
Valuation: Leucadia is reasonably priced. Book value is $10 billion, just under $28 per share. The stock price has been at or below book value for the past year, and as of early October, is selling under $23.
Earnings: Earnings have averaged $3 per share for the last five years and tend to be lumpy, as Leucadia harvests an investment. Not all of Leucadia’s businesses are attractive ones—the beef and lumber operations are very commodity price dependent. But, in total, the economics of these businesses should enable a 10%+ return on equity over time.
Alignment of Interests: Joe & Ian, who built the company, own just over 10% of the stock. Rich & Brian, and their families, own another 3.5% (their shares worth about $300 million.) To us, that’s a huge plus…alignment of interest between owners and managers.
Risks – Brokerage: While Leucadia often is called the baby Berkshire, their business model has greater risk than Berkshire’s. Berkshire is an insurance company, meaning it holds cash from policies, awaiting claims, and uses that cash to invest in businesses. Here the core business is a broker, meaning they need financing for their inventory of marketable securities. Jefferies is well run, but as 2008-09 showed, if the economy gets bad enough, it can be difficult to finance an inventory of even high quality securities.
Risks – Lack of Focus: The conglomerate model goes in and of fashion. Part of the legitimate concern is that Leucadia invests in many different types of businesses…do they really understand all of them?
Risks – Timing: Leucadia has made numerous investments in the last eighteen months. Perhaps they have been able to find pricing of investments more attractive than the norm, perhaps not.
Conclusion: On balance, a superior risk return relationship than with most other publicly traded marketable securities, including a number we continue to own. Buying at prices around book value likely will lead to 10%+ returns over a ten year holding period. We own Leucadia and continue to accumulate. A caution: no idea on the short term (two to three year) likely change in Leucadia’s stock price, only a conviction that over a long term, its businesses will prosper and the stock price will, eventually and imperfectly, mirror that prosperity.