Monday, November 9, 2009

Loews Still Attractive

Loews (L) continues to provide value to its shareholders, while the market continues to undervalue its shares. I'm not going to break down each of its companies, but rather look at the bigger picture and the comments from their management.

Here are some statements by CEO Jim Tisch (one of the best around, I may add).

-Loews reported a solid quarter reflecting improved results in CNA, continued strong results in Diamond Offshore, and higher investment income in the holding company portfolio. During the third quarter Loews' book value per common share increased by over 14%, primarily as a result of the $1.7 billion increase in the mark-to-market value of CNA's investment portfolio. What a difference a quarter makes.

-At the end of the third quarter, CNA's book value per share stood at $35.38 compared to $20.92 at year end '08. This improvement was primarily the result of narrowing credit spreads in the fixed income market. While we are quite pleased to see the improvement in CNA's balance sheet, the volatility of fixed income security prices over the past year underscores how one could be potentially mislead by mark-to-market accounting, especially with the respect to unrealized losses at property and casualty insurance companies.

-And with that I'll get off my accounting soapbox and get back to our results. Diamond Offshore reported another quarter of excellent results. The big story for the quarter was Diamond's purchase of the Ocean Valor, a newly constructed dynamically positioned drilling rig that is capable of operating in 7,500 feet of water.

-Diamond was able to acquire the rig at auction for approximately $490 million, well below the recent cost to construct a similar new build rig. The rig is being actively marketed for work commencing in early 2010, which by our calculation is a lot better than waiting three years for the completion of a new build rig. This acquisition is consistent with Diamond's successful strategy of buying attractive assets at a time when purchases are possible at favorable pricing.
To replenish available cash after the rig acquisition, Diamond used its strong balance sheet to go to the debt markets and was able to issue $500 million of long-term debt due in 30 years at the very attractive rate of 5.75%. Diamond's board of directors recently declared special and regular – regular and quarterly dividends which together total $2 per share and market continuation of Diamond's policy of paying out special cash dividends reflecting the earnings and financial position of the company.

About acquisitions:

-We are always looking. The issue right now though I believe is exactly what's going to happen in the economy. My guess is that the economy is going to be very sluggish for a long time, maybe on the order of, if we're lucky, 1% to 2% growth. And I don't see this as a typical recession and I don't see this as a period where we're going to have 4% to 6% growth for the next year or so. I think it'll be very sluggish and I think that additional taxes and mandates will just be additional headwinds for the economy. I say all that as preamble because if we were to buy anything, I would not want to pay up in price anticipating that the economy and, therefore, business in the business cycle will resume. So like it said on the front page of the Wall Street Journal, jittery companies stash cash. You can count Loews Corporation as one of those companies.

And as what is usually the case, Tisch comments about the stock being undervalued:

-Well, there are two things you can do. You can complain about the prices of stock and the value of the stock, or you can do something about it. And there are multiple ways to do something about it. One is, I guess as you suggest, is to cast some holdings overboard. We're not looking to do that. The other way to deal with that is to buy in shares and in the past four months the company's brought in 4.5 million shares.

-As I like to say about our share repurchase history, we have a long and glorious history of share repurchases, buying in shares when the stock trades at a discount. Just to get on my soapbox again and provide an advertisement, Loews' stock has appreciated. Loews shareholders for the past 50 years have had a 16% rate of return on their shares compared to 9% for the S&P 500. So that if you have $1 50 years ago and you invested in the S&P 500, it would be worth about $75 now.

-On the other hand, that dollar if you would have invested in Loews at 16% would be worth $1,600 or $1,700. So the appreciation of Loews has been quite extraordinary. And one reason for that has been that we have aggressively bought in the shares. In 1970 we had the equivalent of 1.3 billion shares outstanding. Today it's below 430 million.

-For the life of me, I do not understand why the market values Loews so cheaply, but having said that I'm not complaining about it. Instead we're buying in the share and we're using that as an opportunity to create long-term value for all Loews shareholders. Beyond buying in the shares and doing what we're doing, I don't know what else we can do to close that valuation gap. It is a great frustration to me, but also I see it as a great opportunity.

So to summarize things, Loews remains on the same path. Conservative about the economy and its balance sheet. They'll look for acquisitions if they make sense. Their stock remains undervalued, and they'll continue to buyback shares if it continues. This is the kind of stock you can just buy and sit on. I plan to do some of that, but have just been a bit picky about where I buy. On a side note, that's a common approach for me. I'm usually pretty good at finding opportunities, and you're welcome to buy when I do, or be a bit more aggressive, which may pay off for you.

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