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WIKI ANALYSIS
Often referred to as a "miniature" Berkshire Hathaway, Leucadia National (LUK) is a diversified stock-holding company which specializes in investing on businesses that are either distressed or poorly managed. Its core strategy is to buy assets when price is low and sell when price is high. Leucadia National (LUK)'s portfolio covers mining, manufacturing, communications, leisure, gas, medical production, and real estate industries. [1] Leucadia National (LUK) has experienced relatively persistent growth over the years. Though Leucadia National (LUK) hasn't been absolutely immune to the 2007 Credit Crunch and 2008 Financial Crisis, Leucadia National (LUK) was able to avoid the worst of the financial crisis compared to its competing companies by winding down its lending activities by 2004.[2] Leucadia National (LUK) has a diverse portfolio which includes iron and copper mines, lumber and plastic manufacturers, a prepaid calling card provider, a hotel and casino, wineries, an oil and gas contract driller, energy production facilities, medical product developers, and other real estate interests.[3]
Business Overview
Leucadia National (LUK) has a diverse portfolio which includes iron and copper mines, lumber and plastic manufacturers, a prepaid calling card provider, a hotel and casino, wineries, an oil and gas contract driller, energy production facilities, medical product developers, and other real estate interests.[4]
| 1 Year | 3 Year | 5 Year | 10 Year | |
|---|---|---|---|---|
| Revenue (%) | 33.9 | -20.1 | 36.7 | 6.0 |
| Operating Income (%) | -74.5 | -29.0 | - | 10.0 |
| Stock Total Return (%) | -54.4 | -6.6 | 7.2 | 16.8 |
| Earnings/Share % | 248.3 | 44.0 | 18.2 | - |
| Dividends % | 0.0 | 26.0 | 24.6 | 11.6 |
| Book Value/Share % | 39.1 | 33.4 | 22.8 | 9.3 |
| +/- Industry | -1.0 | 8.8 | 12.2 | 16.5 |
| +/- Market | -14.3 | 4.2 | 10.7 | 18.1 |
Business and Financial Metrics
| ($ in thousands) | 2005 | 2006 | 2007 |
|---|---|---|---|
| Manufacturing ($ in thousands) | 332,253 (48%) | 450,835 (52%) | 397,113 (34%) |
| Telecommunications ($ in thousands) | - | - | 361,742 (31%) |
| Property management and service fees ($ in thousands) | - | - | 80,892 (7%) |
| Gaming entertainment ($ in thousands) | - | - | 38,042 (3%) |
| Investment and other income ($ in thousands) | 148,814 (22%) | 294,678 (34%) | 181,465 (16%) |
| Net securities gains ($ in thousands) | 208,816 (30%) | 117,159 (14%) | 95,641 (8%) |
| Total | 689,883 | 862,672 | 1,154,895 |
| 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|
| 1,636,041 | 189,399 | 484,294 | 186,778 [8] |
Financial Discussion Leucadia National (LUK) reported on June 30, 2008 net sales of $337,554,000, a change of -1.9% from the same period a year ago. [9] Net income (after tax) was reported at $186,778,000, a change of 610.2% from the same period a year previously[10]. Diluted EPS were $0.76, compared with $0.12 in the prior year. [11]
3Q08 Financial Discussion Leucadia National (LUK) reported a significant decline in book value per share during the third quarter from $31 to $25 per share. [12]This was the consequence of a decrease in the market values of its investments. Leucadia National (LUK) 's major mining investment, Fortescue Metals, lost 80% of its market value between June 30 and November 3.[13] Additionally, Leucadia National (LUK)'s shares in AmeriCredit (ACF) and Jefferies Group (JEF), along with its Argentinian investments faced declines in value.[14] The weakened economy also stalled Leucadia National (LUK)'s operating businesses as can be seen in a 24% fall in revenues compared to the same period in 2007. [15]
| Term | Dec 07 | Mar 08 | Jun 08 | Sep 08 | ||
|---|---|---|---|---|---|---|
| Revenue ($Mil) | Most Recent Period
Prior Year Period | 282.6
176.4 | 324.9
197.2 | 337.6
344.0 | 251.6
331.1 | |
| Revenue Growth (%) | Most Recent Period
Prior Year Period | 60.2
- | 64.7
-49.0 | -1.9
29.2 | -24.0
94.5 | |
| Earnings Per Share ($) | Most Recent Period
Prior Year Period | 1.59
0.05 | -0.43
0.04 | 0.76
0.12 | 0.37
0.02 |
Business Segments
Leucadia National (LUK) shares holdings in the following businesses.
Mining and Manufacturing
- Fortescue Metals Group Ltd. (FSUMF) [17] is an iron ore mining company based in Australia traded on the Australian Securities Exchange (ASX: FMG).
- Cobre Las Cruces beholds Leucadia National (LUK) 's copper mining operations through the acquisition of MK Gold and association with Inmet Mining Corporation (TSX: IMN).[18]
- Idaho Timber [19] is engaged in the manufacture and distribution of various wood products.
- Conwed Plastics[20] manufactures and markets lightweight plastic netting for a variety of purposes and is a market leader in the sale of products used in carpet cushion, turf reinforcement, erosion control and packaging
Telecommunications
STi Prepaid[21] is a facilities-based provider of long distance wireline and wireless telecommunications services headquartered in New York.
Property Management and Services
- ResortQuest[22] manages vacation rentals for the owners of 7,766 units.
Gaming Entertainment and Leisure
- Premier Entertainment Biloxi is the parent company of the Hard Rock Biloxi[23] which owns the Hard Rock Hotel & Casino in Biloxi, Mississippi.
- Pine Ridge Winery[24] is located in Napa Valley, California.
- Archery Summit[25], also a winery, is situated in the Willamette Valley of Oregon.
Energy
- Goober Drilling provides services to oil and natural gas exploration and production companies in the Mid-Continent Region of the U.S., primarily in Oklahoma and Texas.
- Louisiana Gasification Project, a petroleum coke gasification operation at the Port of Lake Charles located in Lake Charles, Louisiana is financed through Leucadia National (LUK)'s subsidiary and beneficiary, Lake Charles Cogeneration LLC.
- Liquefied Natural Gas operations which are to be located on the Skipanon Peninsula in Warrenton, Clatsop County, Oregon are executed through leasehold interest and permits obtained from Calpine Corporation (CPN).
Medical Product Development
- Sangart11[26] is a biopharmaceutical company that has been working for many years developing an oxygen transport agent as a substitute for whole blood.
- Chakshu12[27] is currently developing prescription eye drops to address the symptoms of early stage cataracts.
Real Estate
At December 31, 2007, the book value of Leucadia National (LUK)'s domestic real estate properties increased from $176.7 million to $225.4 million, compared to that of its previous year.
Financial and Other
- Leucadia National (LUK) is involved in the share holdings and/or acquisitions of Australian Securities Exchange FMG common stock, Jefferies High Yield Holdings (JHYH), Pershing Square IV, AmeriCredit (ACF), Highland Opportunity Fund L.P., HFH ShortPLUS Fund, L.P., RCG Ambrose, L.P.
Key Trends and Forces
With the expirement of contracts nearing, chief officers Ian M. Cumming[28] and Joseph S. Steinberg[29] face resignition at 2015 without sufficient successors, stemming managerial risks
The recruit of new executives to make up for the loss of former ones due to the expiration of contracts and retirement is not a new trend that businesses face. Leucadia National (LUK), faced by this obstacle as well, is currently dependent on key personnel, Chairman of the Board Ian M. Cumming, and President Joseph S. Steinberg. Both of whose contracts are to expire by June 30, 2015, are not only the largest stockholders of the company, sharing approximately 11.3% and 12.5% of Leucadia National (LUK) 's outstanding common shares, respectively, but are also essential to all of Leucadia National (LUK)'s operations.[30] Dating back to the early developing stages of Leucadia National (LUK) in the 1970's, the history of Leucadia National (LUK) is indivisible with these two executives. Leucadia National (LUK) faces the inevitable managerial task of not merely finding successors for these two, but finding successors who will mount to the level of dedication and performance which Mr. Cumming and Mr. Steinberg have exercised over the years. Consequently, this issue arises as a big risk for Leucadia National (LUK)'s future.
2007 Credit Crunch, 2008 Financial Crisis accompanied with Deflation
Leucadia National (LUK) operates in a variety of industries and market sectors, all of which are very competitive and susceptible to economic downturns and would be adversely affected by a recession. [31] The 2007 Credit Crunch, stemming the 2008 Financial Crisis has decreased the consumption of goods and services. This has consequently led into an economic recession, exposing Leucadia National (LUK) to the vulnerability of the financial market, which have subsequently influenced its investments.
Impact on Manufacturing Businesses
Declines in the U.S. housing market have reduced revenues and profitability of the manufacturing businesses. Though Leucadia National (LUK)'s manufacturing operations have not faced losses, its annual revenues have consistently decreased during the past years.[32]
| 2006 | 2007 | 2008 (for the 9-month period ended September) |
|---|---|---|
| 450,835 | 397,113 | 274,482 |
Other risks of Leucadia National (LUK)'s manufacturing operations include subjectivenss to increased volatility in raw material prices and availability of key raw materials.[33]
Impact on Other Investments
Leucadia National (LUK) has made substantial investments on Fortescue, Inmet and CLC, entities which are engaged in the mining of base metals (principally iron ore and copper). Both investments were subject to decreases in income at 2008 compared to 2007. Leucadia National (LUK)'s initial investment of $1,862,100,000 on Fortescue Metals Group Ltd. (FSUMF) common stock has recently faced sharp declines in value.<refLUK 2008 10-Q3</ref> Fortescue Metals Group Ltd. (FSUMF) Stock Price 2008
[34]
</center>
Leucadia National (LUK), as of December 31, 2007, had loaned $80,000,000 to Inmet and CLC. CLC has not been persistent in terms of revenues and losses. [35]
| 3-month period ended March 31,2007 | 3-month period ended March 31,2008 | 6-month period ended June 30, 2007 | 6-month period ended June 30, 2008 | 9-month period ended September 30, 2007 | 9-month period ended September 30, 2008 |
|---|---|---|---|---|---|
| (100) | 3,900 | 900 | 4,500 | 4,500 | (3,900) |
Demand for Commodities
Demand for Iron Ore
Since the 1950's, the price of iron ore has faced a long-term decline in price. But from 2003, prices have been increasing, mainly due to China's incrementing demands. The market for iron ore has faced a shortage in supply as producers failed to keep up with high demand. Global demand for seaborne iron ore in 2007 was 788 million tonnes, of which China represented 48% of the total, compared with 16% in 2000 and 11% in 1990. The price of iron ore has consequently reacted to this supply shortage, for in 2003 the contract benchmark price increased by 9%, followed by 18.6% in 2004, 71.5% in 2005, 19% in 2006, and 9.5% in 2007.[39]
Demand for seaborne iron ore is anticipated to continue growth. According to a forecast by Macquarie Group (MQG-AU)'s research team, Emerging Markets in Asia led by China and India are expected to continue to increase their demand for iron ore by year 2020. [40]
China's share of world materials demand (1980-2020)
(Macquarie Research)
.gif)
India's share of world materials demand (1980-2020)
(Macquarie Research)
.gif)
Demand for Energy
By 2030, worldwide energy demand will be more than 50% greater than it is today (Rising Worldwide Demand for Energy). [43] Leucadia National (LUK) has invested in three businesses of the energy sector. Investments in the Louisiana Gasification Project, and Liquefied Natural Gas are under process. Meanwhile, Leucadia National (LUK)'s aggregate outstanding loan amount for Goober Drilling of $171,000,000 (excluding accrued interest) as of December 31, 2007, has steadily increased Leucadia National (LUK)'s income. | 2007 | 2008 | |
|---|---|---|
| Goober Drilling | 7,500 | 20,700 |
Projected Worldwide Energy Consumption, 1980-2030, EIA
[45]
Competition
Competition for Leucadia National (LUK) comes from publicly-traded equity firms. Many of these firms include business development companies, such as American Capital Strategies (ACAS), Ares Capital (ARCC), and Allied Capital (ALD).
- American Capital Strategies (ACAS)[46], with $17 billion compared to Leucadia National (LUK)'s $8.1 billion[47] in capital resources under management, is a private equity fund and alternative asset management company regulated under the Investment Company Act of 1940.[48].
- Ares Capital (ARCC) [49], in contrast with Leucadia National (LUK)'s diversified portfolio, is a closed-end, non-diversified, specialty finance company that is regulated as a business development company under the Investment Company Act of 1940.[50]
- Allied Capital (ALD)[51], another business development company and investor in the private equity industry regulated under the Investment Company Act of 1940.[52]
.
| Close Competitors | Currency(Mil) | Market Cap | TTM Sales | Oper Income | Net Income |
|---|---|---|---|---|---|
| Leucadia National Corporation | USD | 4,518 | 1,197 | -140 | 626 |
| American Capital Strategies (ACAS) | USD | 806 | 1,187 | 623 | -1,674 |
| Ares Capital (ARCC) | USD | 438 | 232 | - | -14 |
| Allied Capital (ALD) | USD | 381 | 398 | - | -434 |
References
- ↑ LUK 2007 10-K pg.1
- ↑ [LUK 2004 10-K]
- ↑ LUK 2007 10-K pg.1
- ↑ LUK 2007 10-K pg.1
- ↑ LUK 10-K
- ↑ LUK 2007 10-K pg.4
- ↑ LUK 2007 10-K pg.4
- ↑ LUK 2008 10-Q2
- ↑ LUK 2008 10-Q2 pg.7
- ↑ LUK 2008 10-Q2 pg.2
- ↑ LUK 2008 10-Q2 pg.2
- ↑ LUK 2008 10-Q3
- ↑ LUK 2008 10-Q3
- ↑ LUK 2008 10-Q3
- ↑ LUK 2008 10-Q2
- ↑ LUK 2008 10-Q
- ↑ Fortescue Metals Group Ltd.
- ↑ Inmet Mining Corporation
- ↑ Idaho Timber
- ↑ Conwed Plastics
- ↑ STi Prepaid
- ↑ ResortQuest
- ↑ Hard Rock Biloxi
- ↑ Pine Ridge Winery
- ↑ Archery Summit
- ↑ Sangart11
- ↑ Chakshu12
- ↑ Ian M Cumming has been the Chairman at Leucadia since 1978. He has been the Chairman at FINOVA since 2001. Mr. Cumming has been a Director at Skywest, a Utah-based regional air carrier, since 1986 and a Director at HomeFed since 1999. He is also a Member of Premier's Board of Managers since 2006. Mr. Cumming is an Alternate Director at Fortescue.
- ↑ Joseph S Steinberg has been the President at Leucadia since 1979. He has been a Director at the company since 1978. In addition, Mr. Steinberg has served as a Director at JII since 1988, HomeFed since 1998 (Chairman since 1999) and FINOVA since 2001. He is a Member of Premier’s Board of Managers since 2006. Mr. Steinberg has served as a Director at Fortescue since 2006.
- ↑ [http://www.sec.gov/Archives/edgar/data/96223/000009622308000015/lnc200710k.txt LUK 2007 10-K pg.21
- ↑ [LUK 2007 10-K pg.21
- ↑ [LUK 2007 10-K pg.21
- ↑ LUK 2007 10-K pg.21
- ↑ Marketwatch FSUMF
- ↑ LUK 2007 10-K pg.19
- ↑ LUK 2008 10-Q1, pg.23
- ↑ LUK 2008 10-Q2, pg.27
- ↑ LUK 2008 10-Q3 pg.30
- ↑ Macquarie Research
- ↑ Macquarie Research
- ↑ Macquarie Research
- ↑ Macquarie Research
- ↑ Energy Information Administration
- ↑ LUK 2008 10-Q3
- ↑ Energy Information Administration
- ↑ ACAS 2008 10-K
- ↑ LUK 2007 10-K
- ↑ 15 U.S.C. § 80a-1 through 15 U.S.C. § 80a-64
- ↑ ARCC 2007 10-K
- ↑ 15 U.S.C. § 80a-1 through 15 U.S.C. § 80a-64
- ↑ ALD 2008 10-K
- ↑ 15 U.S.C. § 80a-1 through 15 U.S.C. § 80a-64
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