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

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. 

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. 

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. 

Catalyst

- Continued share repurchases 

- Rebound in energy markets

- CNA continues at run-rate ROE levels