LOEWS CORP L
November 01, 2016 - 8:49pm EST by
Mustang
2016 2017
Price: 42.36 EPS 0 0
Shares Out. (in M): 337 P/E 0 0
Market Cap (in $M): 14,295 P/FCF 0 0
Net Debt (in $M): -3,200 EBIT 0 0
TEV ($): 11,095 TEV/EBIT 0 0

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  • Conglomerate
  • bet on the man
  • Capital Allocation
  • Sum Of The Parts (SOTP)

Description

Introduction:

In today’s market where bargains are hard to find, I think Loews represents an interesting opportunity to invest alongside a team of value investors at a price below its sum of the parts value both on a current market value and intrinsic value basis.  The Company has a long history of delivering value to shareholders, but over the past 10 years, the stock is essentially flat - largely due to some tough times in the oil & gas space and the fact that its biggest investment, CNA stock, has also been roughly flat over that same period.

CNA:

CNA is a property and casualty insurance business that appears to finally be at an inflection point in its long turnaround story.  CNA has dramatically improved its capital position and underwriting over the past several years.  CNA has reduced loss ratios significantly since exiting unprofitable lines in 2012. 

Historical Loss Ratios

 

2012

2013

2014

2015

YTD

Q3

P&C

67.7%

63.8%

62.8%

61.9%

59.4%

54.7%

Commercial

67.6%

63.6%

61.7%

62.3%

64.6%

62.2%

Specialty

68.9%

66.1%

64.6%

61.6%

52.6%

46.8%

 

Due to the improvements in underwriting performance, CNA was able to achieve an annualized ROE of 11% in the past quarter and 7% YTD.  If the Company is able to consistently deliver that level of performance, it should trade at book value compared to the 0.83x book it trades at today based on the comps below. 

Company

Ticker

P/B

Assets / Equity

TTM ROE

Chubb

CB

1.21x

3.4x

6.2%

The Travelers

TRV

1.24x

4.2x

12.0%

Hartford

HIG

0.90x

12.2x

7.6%

 

 

 

 

 

CNA

CNA

0.83x

4.9x

6.9%

 

BWP:

I would refer you to Wains21 10/5/16 write-up on BWP.  I largely agree with his analysis and think intrinsic value is around $23 per share. 

DO:

Diamond Offshore is an offshore driller with a 24 rig fleet.  Diamond has the lowest net debt to 2018E EBITDA of its closest peers, Ensco, Noble, Rowan, and Transocean, which is obviously important in this difficult time for offshore drillers.  Using a 2018 forward EBITDA is relevant given the downward projected trajectory of EBITDA for DO and its peers.  DO has remained FCF positive over the past twelve months.  Its next maturity is in 2019.  DO will almost certainly make the 2019 maturity (bonds currently trade at 104) given its expected FCF generation and availability on the RLOC.  2020 could prove more difficult, as that is when the RLOC comes due.  Even then, only $180mm is currently drawn on the RLOC.  It seems likely that DO will at least make it to its 2023 maturity, which is a $250mm debt payment.  Those notes currently trade at 89 or a 5.2% yield, so even that maturity isn’t exactly signaling financial distress. 

Company

Ticker

P/B

EV/EBITDA

Net Debt / 2018E EBITDA

Ensco

ESV

0.29x

3.4x

6.1x

Noble

NE

0.17x

2.3x

7.2x

Rowan

RDC

0.34x

3.0x

11.0x

Transocean

RIG

0.24x

4.7x

6.7x

 

 

 

 

 

Diamond Offshore

DO

0.63x

4.7x

3.6x

 

While Diamond appears to have the best relative ability to ride out the storm, it also has the highest relative valuation.  I have left Diamond’s intrinsic value equal to market value in my valuation analysis. 

Hotels:

Loews hotels consists of 25 hotels or 11,448 rooms generating $1.1Bn of revenue.  13 of the hotels are owned, 10 are in JVs where Loews is a 50% owner and the remaining 2 are managed by Loews.  The hotel business has grown from $66mm of EBITDA in 2013 to $174mm in the LTM period, as the Company added 10 hotels over that time period.  Current hotel cap rates average 7.8%.  I believe these would trade for lower cap rates given their above average RevPar of $209, however I have valued them at the market average.  The hotels have $1.1Bn of mortgage debt which I have deduced to get to the Loews equity value.   

Net Cash:

The parent company has $5Bn of cash and $1.8Bn of unsecured notes with maturities ranging from 2023 – 2043.  

Management:

Loews is the investment vehicle for the Tisch family who invests using a value investing philosophy emphasizing patience and waiting for the right time to buy in the business cycle to buy out of favor and undermanaged assets.  They seem very attuned to cycles and buying with significant downside protection through valuation.  They are not traders, and have had all of their core holdings for over 20 years.  They also do a good job selling into strong cycles like they did with BWP, Bulova, and LO in 2006.  The one large blemish on their track record appears to be HighMount, which was an E&P company they bought for $4Bn in 2007 and then sold for $805mm in 2014. 

The family owns 17.5% of the stock, and their salaries and option packages are not egregious - certainly more cost effective than the average mutual or hedge fund.

Valuation:

Buying Loews today results in buying the sum of the Company’s parts at a 12% discount on a market value and a 23% discount on an intrinsic value basis.  Further, excluding cash, those discounts widen to 19% and 44%, respectively.  Note that I have taxed impacted the subsidiaries that have under 80% ownership (80%+ divisions could be spun tax free) by digging around for old purchase prices.  Note that DO could go bankrupt and wipe out the equity, and you still wouldn’t lose money at market valuations.  Note that you could have BWP and DO go away, and you would still have enough intrinsic value at CNA, the hotels, and cash to cover the current market capitalization. 

     

Mkt

 

Company

Shares

Price

Value

IV

C.N.A.

242.6

$36.34

$8,818

$10,727

DO

73.1

$16.71

1,222

1,222

BWP

125.6

$16.80

2,153

2,932

Hotels

1.0

$1,052

1,052

1,052

Net Cash

1.0

$3,200

3,200

3,200

Gross Value

   

$16,445

$19,133

Tax Impact

 

 

(261)

(534)

Net Value

   

$16,183

$18,599

         

L Market Cap

   

$14,295

$14,295

Discount

   

-11.7%

-23.1%

Discount Ex Cash

   

-19.4%

-43.6%

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

- Continued share repurchases 

- Rebound in energy markets

- CNA continues at run-rate ROE levels 

1       sort by    

    Description

    Introduction:

    In today’s market where bargains are hard to find, I think Loews represents an interesting opportunity to invest alongside a team of value investors at a price below its sum of the parts value both on a current market value and intrinsic value basis.  The Company has a long history of delivering value to shareholders, but over the past 10 years, the stock is essentially flat - largely due to some tough times in the oil & gas space and the fact that its biggest investment, CNA stock, has also been roughly flat over that same period.

    CNA:

    CNA is a property and casualty insurance business that appears to finally be at an inflection point in its long turnaround story.  CNA has dramatically improved its capital position and underwriting over the past several years.  CNA has reduced loss ratios significantly since exiting unprofitable lines in 2012. 

    Historical Loss Ratios

     

    2012

    2013

    2014

    2015

    YTD

    Q3

    P&C

    67.7%

    63.8%

    62.8%

    61.9%

    59.4%

    54.7%

    Commercial

    67.6%

    63.6%

    61.7%

    62.3%

    64.6%

    62.2%

    Specialty

    68.9%

    66.1%

    64.6%

    61.6%

    52.6%

    46.8%

     

    Due to the improvements in underwriting performance, CNA was able to achieve an annualized ROE of 11% in the past quarter and 7% YTD.  If the Company is able to consistently deliver that level of performance, it should trade at book value compared to the 0.83x book it trades at today based on the comps below. 

    Company

    Ticker

    P/B

    Assets / Equity

    TTM ROE

    Chubb

    CB

    1.21x

    3.4x

    6.2%

    The Travelers

    TRV

    1.24x

    4.2x

    12.0%

    Hartford

    HIG

    0.90x

    12.2x

    7.6%

     

     

     

     

     

    CNA

    CNA

    0.83x

    4.9x

    6.9%

     

    BWP:

    I would refer you to Wains21 10/5/16 write-up on BWP.  I largely agree with his analysis and think intrinsic value is around $23 per share. 

    DO:

    Diamond Offshore is an offshore driller with a 24 rig fleet.  Diamond has the lowest net debt to 2018E EBITDA of its closest peers, Ensco, Noble, Rowan, and Transocean, which is obviously important in this difficult time for offshore drillers.  Using a 2018 forward EBITDA is relevant given the downward projected trajectory of EBITDA for DO and its peers.  DO has remained FCF positive over the past twelve months.  Its next maturity is in 2019.  DO will almost certainly make the 2019 maturity (bonds currently trade at 104) given its expected FCF generation and availability on the RLOC.  2020 could prove more difficult, as that is when the RLOC comes due.  Even then, only $180mm is currently drawn on the RLOC.  It seems likely that DO will at least make it to its 2023 maturity, which is a $250mm debt payment.  Those notes currently trade at 89 or a 5.2% yield, so even that maturity isn’t exactly signaling financial distress. 

    Company

    Ticker

    P/B

    EV/EBITDA

    Net Debt / 2018E EBITDA

    Ensco

    ESV

    0.29x

    3.4x

    6.1x

    Noble

    NE

    0.17x

    2.3x

    7.2x

    Rowan

    RDC

    0.34x

    3.0x

    11.0x

    Transocean

    RIG

    0.24x

    4.7x

    6.7x

     

     

     

     

     

    Diamond Offshore

    DO

    0.63x

    4.7x

    3.6x

     

    While Diamond appears to have the best relative ability to ride out the storm, it also has the highest relative valuation.  I have left Diamond’s intrinsic value equal to market value in my valuation analysis. 

    Hotels:

    Loews hotels consists of 25 hotels or 11,448 rooms generating $1.1Bn of revenue.  13 of the hotels are owned, 10 are in JVs where Loews is a 50% owner and the remaining 2 are managed by Loews.  The hotel business has grown from $66mm of EBITDA in 2013 to $174mm in the LTM period, as the Company added 10 hotels over that time period.  Current hotel cap rates average 7.8%.  I believe these would trade for lower cap rates given their above average RevPar of $209, however I have valued them at the market average.  The hotels have $1.1Bn of mortgage debt which I have deduced to get to the Loews equity value.   

    Net Cash:

    The parent company has $5Bn of cash and $1.8Bn of unsecured notes with maturities ranging from 2023 – 2043.  

    Management:

    Loews is the investment vehicle for the Tisch family who invests using a value investing philosophy emphasizing patience and waiting for the right time to buy in the business cycle to buy out of favor and undermanaged assets.  They seem very attuned to cycles and buying with significant downside protection through valuation.  They are not traders, and have had all of their core holdings for over 20 years.  They also do a good job selling into strong cycles like they did with BWP, Bulova, and LO in 2006.  The one large blemish on their track record appears to be HighMount, which was an E&P company they bought for $4Bn in 2007 and then sold for $805mm in 2014. 

    The family owns 17.5% of the stock, and their salaries and option packages are not egregious - certainly more cost effective than the average mutual or hedge fund.

    Valuation:

    Buying Loews today results in buying the sum of the Company’s parts at a 12% discount on a market value and a 23% discount on an intrinsic value basis.  Further, excluding cash, those discounts widen to 19% and 44%, respectively.  Note that I have taxed impacted the subsidiaries that have under 80% ownership (80%+ divisions could be spun tax free) by digging around for old purchase prices.  Note that DO could go bankrupt and wipe out the equity, and you still wouldn’t lose money at market valuations.  Note that you could have BWP and DO go away, and you would still have enough intrinsic value at CNA, the hotels, and cash to cover the current market capitalization. 

         

    Mkt

     

    Company

    Shares

    Price

    Value

    IV

    C.N.A.

    242.6

    $36.34

    $8,818

    $10,727

    DO

    73.1

    $16.71

    1,222

    1,222

    BWP

    125.6

    $16.80

    2,153

    2,932

    Hotels

    1.0

    $1,052

    1,052

    1,052

    Net Cash

    1.0

    $3,200

    3,200

    3,200

    Gross Value

       

    $16,445

    $19,133

    Tax Impact

     

     

    (261)

    (534)

    Net Value

       

    $16,183

    $18,599

             

    L Market Cap

       

    $14,295

    $14,295

    Discount

       

    -11.7%

    -23.1%

    Discount Ex Cash

       

    -19.4%

    -43.6%

     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    - Continued share repurchases 

    - Rebound in energy markets

    - CNA continues at run-rate ROE levels 

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