Loews Corporation, run by the Tisch family, has often been compared to a baby Berkshire alongside Brookfield Asset Management or Markel. The company owns outright or stakes in several companies, both public and private. As often seen with this type of corporate structure, a conglomerate discount is applied and the stock can look attractive on a sum-of-the-parts basis.
A brief summary of the holdings can be found here.
The company is well aware of the discount, which has been persistent over the years. The company is a perpetual buyer of its own stock on the open market. From 2007 to the most recent quarter, just under 25% of the shares outstanding have been repurchased.
As for the unlisted components of the stock, the hotel portfolio is carried at book value, but the real estate values have grown immensely since their purchase. The natural gas acreage via the Highmount Exploration subsidiary has also shown promise and JVs and purchases have been undertaken by others in the same field. There are also unlisted securities in the companies that are listed: CNA preferred stock, Boardwalk Class B units and some Boardwalk debt.
The stock has been featured in Barron’s, Value Investor’s Club, and numerous blogs. I have very little to add from a quantitative analysis standpoint, but I have some ruminations about the discount and why it should close.
I would classify the conglomerate discount under two different types dynamics. First is a holding company, where a parent holds stakes in companies. In such cases, GAAP earnings can be convoluted because the earnings do not actually pass up to the parent. From a real world perspective, the parent transitively benefits from the earnings being reinvested at the company level and increasing the value of the stake. The stock market does not seem to be a big fan of such a structure, as it inhibits realization of underlying value.
The other dynamic of conglomerate discounts seems to be companies with unrelated segments, some boring some sexy. Even though earnings go straight through the parent company, a discount is still applied because the earnings might not be optimally reinvested or a stagnant segment obscures an attractive one.
When I think of Loews, it falls vaguely under the former classification. At the same time, what is actually occurring at Loews is not typical of such operations. A lot of the earnings from BWP and DO make their way into the parent through dividends, which are fairly close to the earnings of those stakes due to the limited reinvestment needs of a rig operator and the MLP structure of BWP.
Loews has acted responsibly in the past to minimize tax implications of their moves to increase shareholder value. The Lorillard spinoff was done in a way that resulted in no taxes being paid. In the instance of the shares of BWP and DO, the way to fully realize their value is through receiving the dividend checks every quarter, as opposed to liquidating the holdings as taxes on such a sale would represent a pretty penny as Loews has held these assets for years. So for the very reason that I suspect the market is applying a discount to net asset value of the company, I am inclined to fairly value them as the status quo is resulting in the full realization of their value.
The crucial factor to recognize, other than the one just stated, is that Loews has consistently increased its value over time. Repurchasing its shares at a discount is additional gravy on top of the discount, because it only widens the disparity of per share value and price. That the price has not followed or that the discount has existed in the past is not relevant to the ultimate value of the company. The company’s actions have consistently exhibited all the characteristics of excellent capital allocation and maximization of shareholder value and patient investors will be rewarded.
Disclosure: Long Loews. Do your own research before making investment decisions.
Talk to Andrew about Loews and conglomerate discounts
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