alex981 wrote up LUK in October 2014; since then, Leucadia’s value per share has grown, while its share price has declined.

LUK is an undervalued company led by managers who have a strong capital allocation focus, and which is repurchasing stock currently at a significant discount to intrinsic value.  For management’s thoughts on capital allocation, please read http://www.leucadia.com/c-p_letters/leucadia_2014_shareholders_letter.pdf

In my view the stock is particularly depressed currently due to year-end tax loss selling.  If the stock goes up from here, owners make money.  If the stock stays low for a while, the per share intrinsic value (and long-term upside) rises due to share repurchases and organic growth.

Background

Leucadia National Corporation is a diversified holding company focused on return on investment and long-term value creation to maximize long-term shareholder value.   Originally run by the legendary investment team of Joseph Steinberg and Ian Cumming, the company purchased Jefferies in 2013, in part to acquire their current leadership team of Rich Handler and Brian Friedman.

The company is opportunistic in its approach and has profited in the past by providing financial rescues to distressed companies (Knight Trading, FXCM, etc).  LUK provides a way to profit from stress in asset markets.

Valuation

Calculation of the value range below is based on SEC filings and the following document: http://www.leucadia.com/luk_investor_day_october_2015.pdf

Jefferies

Full service investment bank.

Low valuation TBV of $3.6 billion.  As a reality check, annual after-tax earnings were in the range of $189-298 million in the 2010-15 time-frame, implying a mid-range 15x P/E.  Clearly, the company is currently under-earning on its capital, but it continues to focus on improving returns in this business.

High valuation  Management publicly stated during its 2015 Investors Day in October that it is targeting a double-digit ROE, which would justify a valuation of 1x BV, or $5.5B.

Berkadia

Originates and services Commercial Real Estate loans.  50/50 JV with Berkshire Hathaway.

Valuation  2015 pre-tax cash earnings estimated at $200 million (1H15:$85; 1H14:$72; 2014:$173 million) x 5 multiple x 50% ownership = $511 million.

National Beef

Beef processor with LTM Revenues of $7.7 billion.  79% ownership.

Low valuation BV of $729 million.

High valuation Cyclical business facing recent cyclical headwinds, with average EBITDA over last five years of $237 million.  Last two cycles appear to have been 10 years long each.  6x multiple x 79% ownership = $1.1 billion.  A very rough calculation using JBS (a large global meat processor) EV/Revenue of 38% yields a very high end valuation of $7.7 billion x 38% x 79% = $2.3 billion.

Garcadia

Owns and operates 27 auto dealerships in CA, TX, IA and MI. 75% ownership.

Valuation Garcadia 1H15 Revenue = $1.38 billion, Pretax Income = $39 million.  Competitors: Lithia Motors EV/1H15 Revenue =1.3x, MV/1H15 Pretax Income = 22.4x; Asbury Group EV/1H15 Revenue =1.0x, MV/1H15 Pretax Income = 14.1x.  Using the lowest valuation of these four choices, the Asbury MV/1H15 = 14.1x $39.3 million x 75% ownership yields a value of $415 million.

 Conwed

Manufactures lightweight plastic netting.

Low valuation BV of $112 million.

High valuation 8x 2014 pretax income of $13.9 = $112 million

Idaho Lumber

Manufactures and distributes wood products.

Low valuation BV of $74 million.

High valuation  8x 2014 pretax income of $17.8 = $142 million

Leucadia Asset Management

Seeds and develops alternative asset management funds.  Assume 50% equity ownership.

Low valuation BV of $531 million, equivalent to LUK capital invested in these funds.

High valuation  BV of $531 million plus 50% x 2% (value/AUM) x $8.9 billion in third party AUM = $620 million.  Please note that the value/AUM ratio has a minor impact on the total high valuation since most of the value is ascribed to invested LUK capital. 

FXCM

Largest retail FX broker in Asia (ex Japan) and US and top 5 in Europe.  Publicly traded (FXCM).  Two year secured term loan plus variable portion of certain distributions including asset sales proceeds.

Valuation  Marked to market.  $613 million plus/minus $22 million per $1 change in the FXCM stock price from September 30, 32015.  Current value $604 million.

HomeFed

Owns and develops real estate projects.  65% ownership of this public company (HOFD).

Valuation  Market value = 10 million shares x $36 per share = $360 million.

Market value of the whole company is $550 million, compared to shareholders equity of $407 million.

For context, one of the company’s assets is land in the Otay Ranch area in San Diego County, which is carried on HomeFed’s books for $42 million as of December 31, 2014.  Gross sales proceeds from land sales over time are expected to be:

Single family homes: 3,700 units x $525,000 home price x 30% land value = $583 million

Multi family homes: 9,350 units x $350,000 home price x 20% land value = $650 million

Commercial space: 1.8 million sf = ? land value

Total gross proceeds for the entitled Otay Ranch land are estimated at over $1.23 billion over many years.

HRG Group

Diversified holding company.  Publically traded (HRG).  23% ownership.

Valuation  46.6 million shares x $13 = $603 million.

Foursight & Chrome

Purchase and service auto and motorcycle loans.

Valuation TBV of $66 million.

Vitesse & Juneau

Oil and gas exploration and development. 

Valuation TBV of $477 million.  Profitable at currently depressed energy prices.

Linkem

Fast growing provider of fixed wireless broadband in Italy.  55% ownership.

Valuation TBV of $142 million.  For context, current annual revenue is estimated at Euro 25 per month x $1.1 per Euro x 12 months x 281,000 subscribers x 55% = $51 million.  Current annual subscriber growth is running at 30%.

Golden Queen

Developing gold project in Kern County, California with partner.  Expect to produce 84,000 gold equivalent ounces annually over 12 years, at a net cash cost of $558 per ounce.  35% ownership.

Valuation TBV of $81 million.  For context, the gross proceeds (after cash production costs, but before other costs) would be 84,000 x 12 x ($1,058-$558) x 35% = $176 million, assuming $1,058 per ounce gold price.

Other

Valuation: TBV of $27 million.

Summary Valuation:

Taxes

Note that LUK had NOLs of $3.4 billion as of December 31, 2014, which should minimize taxes on any asset sales at prices greater than the tax basis.

Share repurchases

During the September 2015 quarter, LUK repurchased a total of 4.4 million (1.1% of fully diluted shares outstanding) of its common shares, 3.5 million (0.9%) of which were purchased during September, at an average price per share of $20.79.