The "Stub" equity of Loews Corporation, the holding company owned by the Tisch family, is currently trading at a highly negative enterprise value, as well as a discount to its publicly traded subsidiaries. Loews has majority ownership in three public companies, CNA Financial (Ticker: CNA), Diamond Offshore Drilling (Ticker: DO), and Boardwalk Pipeline Partners (Ticker: BWP). For a more detailed description of the individual parts of their business, please reference the VIC write-up posted in October 2009, by skimmer610. Unlike many other stubs, this company has a world class management team that has generated significant alpha over long periods of time, and over the last 30 years, Loews has outperformed the S&P 500 by ~6% annually. We recommend a long position in Loews, as well as offsetting short positions in CNA, DO, and BWP, sized based on their proportional ownership of each subsidiary.
Since last October, when it was last written up, the stub initially appreciated substantially (~$2 / share), and although it still did not fully reflect market value for their various subsidiaries and large net cash position, the stub no longer traded at a discount to the publicly traded subsidiaries. Additionally, this stub value was well below the high set in mid 2008, of ~$10 / share. However, over the last few weeks, the stub has gotten substantially cheaper, and is now trading near its recent, as well as longer term, historical lows. Meanwhile, several events have made the opportunity even more attractive, in our eyes.
The company has continued to repurchase shares through their stock buyback program. Management has stated publicly that they see no reason for the company to trade at a discount to their publicly traded parts, and that they are happy to continue to purchase their own shares in the open market if they remain undervalued. Since they began repurchasing shares at the beginning of the 2Q09, they have bought back 17.4 MM shares, ~4% of shares outstanding.
During the first quarter, Loews sold a small portion of their ownership in BWP, slightly less than 10%, in a secondary public offering, priced at $30.02. This created significantly more liquidity for BWP shares (increasing the size of the float by ~15%), and also demonstrated managements willingness to monetize assets at the right price.
The company recently announced plans to sell 2 non-core energy assets, which represent ~17% of total reserves, for $540 MM of net proceeds. On the most recent conference call, management stated that their remaining energy assets, located in the Permian Basin, have superior economics to those that they divested, and have no intention of any additional divestitures in the near term.
Below is our sum of the parts valuation. At fair market value, we believe the company is trading at an ~43% discount to NAV.
Shares Owned (MM's)
Total Value ($, MM's)
Value / Share ($)
*Prices as of 5.12.10
Net of Public Subs
Value ($, MM's)
Total Value ($, MM's)
Value / Share ($)
Net Cash and Investments
CNA Preferred Stock
Boardwalk Class B Units
Net Cash and Investments: The Company has an additional ~$2.5 billion of net cash and investments. The investment portfolio consists of smaller positions in a number of other publicly traded companies, such as UPS, Cisco Systems, Target Corp, Allstate, and Cliffs Natural Resources.
Loews Hotels: Loews Hotels is a luxury hotel company, with 19 hotels and resorts in the United States and Canada, 6 of which include full ownership of the underlying real estate. Loews Hotels has a tangible book value of $171 million. For our purposes, we value the company at 1X tangible book value. We believe this likely understates the value of Loews high end hotel brand.
HighMount Exploration and Production: HighMount E&P is engaged in the exploration and production of natural gas, primarily in the Permian Basin in Texas. Using a conservative reserve multiple of $2 / MCfe, we value HighMount's remaining energy assets at ~$3.3 billion, less $1.1 billion of debt.
CNA Financial Preferred Stock: Loews owns $1 billion of CNA preferred which was issued in September 2008, and pays a 10% dividend. We apply a 10% discount to this preferred stock.
Boardwalk Pipe Class B Units: Loews owns 22.9 MM shares of Boardwalk Pipeline Class B Units, which are convertible into common shares on a 1 for 1 basis after June 30, 2013. These shares lack some of the rights that common shareholders have (their dividends are capped at $.30 / quarter, and they do not have any voting rights), therefore we apply a discount to the current market price of 20%.