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Everyone knows Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B). Given the outstanding performance of Berkshire shares, finding the next Berkshire Hathaway sounds pretty appealing.
One company that looks like the next Berkshire Hathaway is Leucadia National Corp. (NYSE: LUK). The company has been around for more 30 years and is engaged in disciplined value investments, similar to Warren Buffett’s approach. Recently, investors haven’t been giving Leucadia any attention. That’s creating an attractive value play for investors.
A couple of years ago, Leucadia merged with an investment bank named Jefferies. The move added a $6 billion financial services operation to Leucadia’s holdings. The move was similar to Warren Buffett’s Berkshire Hathaway acquiring insurance operations such as GEICO. Those acquisitions transformed the entire company by providing a cheap source of cash for investing.
Just like Berkshire’s Buffett, Leucadia Chairman Ian Cumming and President Joseph Steinberg have been leading their company for more than 30 years. Leucadia hunts for value opportunities, focusing on consumer-driven companies. The company then buys a stake or the entire business. Unlike Berkshire, Leucadia is willing to sell its holdings to book profits. In this way, the company takes a similar approach to a private equity firm.
Today’s holdings bear almost no resemblance to those of four years ago. For example, some of its larger transactions from a few years ago included a Fortescue Metals note redemption and stock sale in 2012 for $868 million; a Inmet Mining merger payment of $732 million, including about $340 million in acquirer Quantum stock; a Mueller Industries stock sale of $427 million; a sale of Keen Energy for $128 million; and the sale of TeleBarbados for $28 million.
Today, Leucadia holds 79% of National Beef, 20% of Harbinger Group (NYSE: HRB), itself a holding company; 96% of Vitesse Energy; 64% of HomeFed (NASDAQ: HOMD), a mixed-use real-estate developer; 53% of Linkem (broadband provider in Italy); 75% of Garcadia (auto dealerships); 100% of Conwed Plastics, 100% of Idaho Timber, 98% of Juneau Energy, and a few other smaller holdings.
By holding stakes in public companies, Leucadia is able to buy or sell shares as it sees fit. That gives the company additional financial flexibility. Its revenues and overall company value also will fluctuate with the market and performance of these stocks.
That’s one of the reasons the stock has struggled as of late. Leucadia moved big into energy right before oil prices collapsed. Meanwhile, the rest of the businesses are doing well but expenses are hobbling it. The company has not yet reported fourth-quarter results. But in the first 9-months of 2014, revenues grew 17% to $8.8 billion. Yet operating income was down 43% to $230 million.
Due to its structure as a holding company, it’s difficult to value Leucadia on traditional metrics such as price-to-earnings. That’s the nature of this business, with liquidity events and investment banking earnings that can vary wildly from quarter to quarter. The stock also blew up in the financial crisis and has never recovered to its previous highs. It has only returned 8% since the beginning of 2009, versus the 102% gain of the S&P 500.
Given the poor performance, Leucadia shares are largely overlooked today. That creates an opportunity for value investors. Like all value plays, it may take years to see the big returns. However, the company’s assets are so strong that they should offer solid returns for long-term investors.
For income investors, Leucadia offers a reasonable 1.1% dividend yield.
With Leucadia, you can buy a little-known holding company that’s beaten up and overlooked. That’s exactly the right time to buy a stock like this – when few investors want to own the company. Looking forward a few years, it’s clear that this Leucadia could be the next Berkshire Hathaway.
Expenses need to be brought under control, and the energy holdings are going to hold back the stock for awhile, but that’s exactly why you move into value when you do – because things are bad but likely to improve.
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