Leucadia's 2009 Letter

[Pablo12345]

The letter is out.

 

http://www.leucadia.com/C&P%20Letters/C&P2009.pdf

[beerbaron]

I don't understand, why did they invest in the vineyards.

 

-It takes 20 years to make a brand with pricing power.

-If you have pricing power, a bad year will hurt your franchise.

-Really segmented market, with no opportunities on consolidating.

-Passionate owner competition willing to work for 2$ an hour... in America.

-Little possibilities to be a low cost producer.

 

Compared with Beer:

-Strong brand recognition

-Consolidation is possible

-Immune to weather conditions

-Can be a low cost producer.

 

Compared with Vodka and other Specialty liquors:

-Incredible brand recognition

-Drug dealer type of margins

-Cost of production has no link with cost of sale

 

Can someone explain?

 

BeerBaron

[Myth465]

I was reading the letter in an interest to understand LUK better and also read a short from 2008 on VIC. The short nailed LUK and was right on just about all fronts. Still working my way thru the letter.

 

I dont understand the rational behind alot of the businesses they buy. Many of them such as timber and rigs are bought near the top of the market. I like the new deal with Berkshire, that should turn out to be profitable, but would also like if they sold off some of the smaller assets that they held.

 

They should trim down like Loews and hold 4 - 8 solid business of scale and size and a few equity investments.

[NormR]

I don't understand, why did they invest in the vineyards.

 

I assume that it is a vanity "investment".  (Always my first guess when I see a vineyard in a portfolio of other stuff.)  But I'd be happy to be corrected as I might be being too cynical.  ;D

[Ballinvarosig Investors]

In fairness, the wine investment is a flyspeck on the tapestry of Leucadia. Reading that letter though, I don't see anything that suggests that Leucadia is undervalued.

 

Leucadia < Berkshire Hathaway < Fairfax

[scorpioncapital]

"Leucadia < Berkshire Hathaway < Fairfax"

 

Can you post your IV estimates for the 3 stocks?

 

Thanks

[NormR]

In fairness, the wine investment is a flyspeck on the tapestry of Leucadia.

 

I agree, but I don't like to see this sort of thing either.

[shalab]

I will offer an opinion on LUK, BRK and FFH and would like to see other opinions

 

LUK is a buy around $22, though I would like $20 a bit more. This is looking at historical prices. LUK typically buys disheveled businesses and I think they have good opportunity to do well in the next several years.

 

BRKA is not super cheap but is not expensive either. I think this still has the potential to go up 10-15% this year. I think BNI will do better than last year ( looking at railroad traffics ) and the equity portfolio has been trending north. I expect it to beat SP500 over the next two years. I would buy it around 100K though.

 

FFH - Again the equity portfolio has been trending north, looking at historical prices, FFH is not cheap now but then the business has been getting stronger. I dont think it is cheap either - I would buy it at $340 (US) or lower.

 

 

 

 

[scorpioncapital]

I believe the Napa winery was purchased from the FDIC of all places, virtually for nothing. The other one was started from scratch with the land, again, being a pittance. It used to be just empty farmland. Basically, the leverage is in the start-up nature and the opportunity happened to be in wine. I was just reading recently that wineries are going into foreclosure left right and centre in Napa due to the recession, this is fertile ground to operate in. Leucadia has always had the motto of turning junk into gold (or at least a reasonable return) and investing in BAD industries and where capital is usually running away from. Bruce Greenwald said it best in a Fora.tv video that value investing is about going where capital is leaving for more exciting places. If beer and spirits are exciting, you can be 100% certain LUK will be going into wine. If Beer and spirits are in the dumps and wine is shining, you can be sure they will do the opposite. They have *always* operated this way. You will seldom seem them go where things are great and the sun is shining. They have made a few mistakes as has been mentioned lumber and rigs when those commodities were hot (although they went into the rigs via a debt financing and then acquired the remaining equity it did not own for a great price and the lumber investment is about patching up defective (and cheap) 2x4's and selling it at market price - junk into gold) but by and large, expect them to go where things are crappy or where capital is sorely needed on a case by case basis.

[shalab]

Regarding BRK, if one looks at the CEG deal, they would have bought the whole thing at 26.5. Unfortunately, that deal didnt close and see where CEG is at today. Markets like last years is Warren Buffett time - we havent seen return from those moves yet. Also, all of Berkshires businesses are distressed giving it a boost as the economy recovers.

[oldye]

http://www.pineridgewinery.com/Store

 

They're not exactly selling 2 buck chuck

[NormR]

I will say one thing about LUK's wine venture, they are open about it.  You don't have to go digging around to find it.  Unlike some other firms.  :-X

 

As an aside, do any analysts follow LUK?  I'm used to not seeing eps estimates on tiny firms but LUK is fairly big.  ???  (Mind you, this may well be a good thing.)

[nodnub]

I believe the Napa winery was purchased from the FDIC of all places, virtually for nothing. The other one was started from scratch with the land, again, being a pittance. It used to be just empty farmland. Basically, the leverage is in the start-up nature and the opportunity happened to be in wine. I was just reading recently that wineries are going into foreclosure left right and centre in Napa due to the recession, this is fertile ground to operate in. Leucadia has always had the motto of turning junk into gold (or at least a reasonable return) and investing in BAD industries and where capital is usually running away from. Bruce Greenwald said it best in a Fora.tv video that value investing is about going where capital is leaving for more exciting places. If beer and spirits are exciting, you can be 100% certain LUK will be going into wine. If Beer and spirits are in the dumps and wine is shining, you can be sure they will do the opposite. They have *always* operated this way. You will seldom seem them go where things are great and the sun is shining. They have made a few mistakes as has been mentioned lumber and rigs when those commodities were hot (although they went into the rigs via a debt financing and then acquired the remaining equity it did not own for a great price and the lumber investment is about patching up defective (and cheap) 2x4's and selling it at market price - junk into gold) but by and large, expect them to go where things are crappy or where capital is sorely needed on a case by case basis.

 

Scorpion, I think you stated in the past that you have a high concentration of LUK in your portfolio. I was wondering if you are a US based investor.... and if not, are you concerned about currency effects in the long term?

 

 

[Myth465]

I like LUK, I think they were caught with their hands in their pockets during 2007 and 2008. They were out of cash, over levered, and farmed out funds to hedge funds which didn't do well in the downturn. They were forced to play defense at a time when the market was full of bargains. I cant fault them, I was in the same position for similar reasons. It looks like they made a great equity deal with the IBank though.

 

I like the royalty income and the setup of both of the mining investments. I also like some of the other assets. The car dealer ships are doing well due to the land lease arrangement and I think the drilling company will actually work out well as long as all of the rigs are new. I would be a buyer but need a lower price.

[bargainman]

I like the royalty income and the setup of both of the mining investments. I also like some of the other assets. The car dealer ships are doing well due to the land lease arrangement and I think the drilling company will actually work out well as long as all of the rigs are new. I would be a buyer but need a lower price.

 

You could always sell some puts and earn some income while waiting for a lower price...

[Guest Bronco]

For what it is worth, I wrote puts for $15 strike, long-term.

 

I don't like doing too much of this though, you eat up margin.  I always like to keep some cash on reserve, and I make sure the cash can cover the put writing.

[link01]

For what it is worth, I wrote puts for $15 strike, long-term.

 

I don't like doing too much of this though, you eat up margin.  I always like to keep some cash on reserve, and I make sure the cash can cover the put writing.

 

i agree with your point about the put writes eating up margin & having the cash reserves to cover the potential assignment. i prefer to wait until the implied volatilities pop upward a bit more tho. of course, if that happens then luk will most likely happen to be in a down trend as well. i'll be mildly interested between 20-22, which is when i generally look to sell a few puts at a lower strike. at 18 i'll be seriously interested...then i'll want some stock...or if i've sold puts some sythetic stock via the purchase of calls.

 

btw, i was very disappointed to see them farm out such large sums to those outside investment firms. i hope that young buck justin wheeler whom they just appointed head of the asset mngt group division will give them good reason to re-think that going forward & bring more of their investment activities in house. in the past they've been highly successful with their direct investments, but they've shown a reluctance to engage in it broadly...they've done mostly control or high influence investments with board representation in the past. maybe thats about to change?

[philassor]

I am a fan of luk but I have to admit that I am a little disconcerted by the CFO (Joseph Orlando) selling most his shares on march 22nd:

 

http://online.barrons.com/article/SB126946826656067059.html

 

What does he know that we don't? Or is it a personal emergency/opportunity he is facing?

[scorpioncapital]

"What does he know that we don't?"

 

I think we can break this down into several possible scenarios.

 

1. He can see into the future (and knows it).

2. He "thinks" he can see into the future (but he really can't and doesn't know it).

3. If #1, he is keeping it secret from the CEO & President because if they found out he knew, they'd sell all 20% of their stake not just a meager 2-4%.

4. He wants the cash now for whatever reason.

5. He doesn't really care to maximize his wealth in LUK stock plus he has another 100,000 of options coming to him.

6. He's a gambler/speculator in the stock market.

7. He factually knows something about Leucadia's operations that is so negative that he thinks the stock will drop because it is overvalued by a large margin (and the CEO & President don't even know because they would have sold out completley as well).

 

[Guest Dazel]

 

We bought Leucadia at around $14 bucks a share.....have sold out...at nice gain. They got caught in the disaster of last year....really badly...

We saw the companies fortunes were totally relying on 4 investments.

Fortesque

inmet

Jefferies

americredit

 

We see that all those investments are fairly valued...Their upside is limited because they did not have any cash to take advantage of the carnage...

We looked at this way....

Fairfax vs. Leucadia

Fairfax was loaded in liquidity and buying left right and center...Market caps were similar....

STEINBERG and CUMMINGS are getting older...Prem and his team are young and very active.

 

*It was a no brainer we took the profits and loaded up on Fairfax.

 

I have the utmost respect for the Leucadia team...they just got caught with their pants down last year! Prem was prepared and took advantage and will reap the rewards for years to come. We think the Fairfax story has just reloaded...The Leucadia one needs time to recoup.

 

Dazel.

 

[Ballinvarosig Investors]

"Leucadia < Berkshire Hathaway < Fairfax"

 

Can you post your IV estimates for the 3 stocks?

 

Thanks

My estimates on the intrinsic values of the above companies is mere opinion. However, when you look at tangible book value, both Berkshire & Leucadia trade at about ~1.4 times book value. Most of Leucadia's book value is held in an equity portfolio that is marked at full value. Berkshire of course has a significant number of assets that are carried on book for less than cost of replacement. So before you even consider a Buffett premium, Berkshire is already cheaper than Leucadia. Fairfax on the othehand is trading at a multiple of only ~1.1 times book value. When you consider that all three companies have come out of the recesson in decent shape and with great earnings, I really can't see why you would pay more for the likes of Leucadia & Berkshire unless you have some intuition that either will outperform Fairfax in the future.

 

It's probably a bit too simplistic to just look at book values when dealing with these stocks. However, when you consider that you're likely to do well from any of these stocks; surely it makes sense to just buy the cheapest one?

[Guest Dazel]

 

Very simple math....

I will leave Berkshire out because Buffett is handicapped by size...so you cannot compare to Leucadia and Fairfax....

 

Fairfax mkt cap $8b Leucadia $6.25b

 

Fairfax has about $22 billion in liquid invested assets (yes more insurance liabilities but hold co. cash is 4 times what Leucadia has)

Leucadia has about $5 billion in assets that are not really liquid and they have debt coming due this year...hold co cash is low.

 

It is an unfair playing field for Leucadia who got sideswiped last year...The Fairfax hand is stacked.

 

Fairfax is not getting a premium but they will...Leucadia's premium is based on the past...they are not in great shape for the future.

 

By the way we were not happy with the Fairfax jump Friday!!!Thought we might be able to back up the truck!

 

Dazel.

[shalab]

On the P/B ratios, BRK has significant non insurance businesses on the balance sheet as does LUK. So, it is not entirely an apples to apples comparison.

[Partner24]

Leucadia top management overall track record is stellar, even when you consider the annus horribilis 2008.

 

They have their own investment style. They historically bought so so businesses, turned them around and then sell them to more optimistic buyers. That model worked very well until 2008, when strong headwinds blasted weak businesses. Add to that the fact that they were optimistic about what emergent countries like China would do on the price of basic materials, and you had the recipe for blood on the street.

 

But Leucadia survived and their top managers learned.

 

Regarding their historical track return and poor 2008, that is were the puck has been. Where the puck will go?

 

Leucadia has some size, but not as big as Berkshire. So they still have a decent universe of investment choices for long term capital appreciation. Then, they are now focused on building "fortress Leucadia", wich means that they are focused on long term quality assets to own instead of financial plays (cigar butts, from what I understand).

 

And finally, regarding the succession issue, as far as I know, it is a subject that they talk about at each board meeting since quite a few years. I guess that they don't take that issue lightly.

 

Suffice to say that I'm a happy shareholder and plan to hold my shares for the long term. This is my smallest position, but so far I've been satisfied.

 

 

[philassor]

"Suffice to say that I'm a happy shareholder and plan to hold my shares for the long term. This is my smallest position, but so far I've been satisfied."

 

I am with you Partner, and I guess today's 5% pop won't hurt. These guys are as shrewed as they come, they are great vultures, and they don't coattail at all. I guess that is why Buffett gets into ventures with them.