JEF - Jefferies Group

[HJ]

"f Leucadia’s TSR and ROTDE annual growth rates are less than 4%, our Executives will not receive any 2016 incentive compensation. If Leucadia’s TSR and ROTDE both grow by between 4% and 8% on a compounded basis over the three-year measurement period, each of our Executives will be eligible to receive 2016 incentive compensation of between $12.5 million and $25 million in RSUs. This incentive compensation level is intended to place our Executives in the median range among Leucadia’s peers (at approximately the 50th percentile level). Three-year annual growth rates of 8% in ROTDE would increase tangible equity by approximately $1.6 billion; and three-year annual growth rates of 8% in TSR would result in aggregate share-price appreciation of approximately $1.6 billion. If

 

 

TSR and ROTDE growth rates are greater than 8%, our Executives are eligible to receive up to an additional 50% in incentive compensation on a pro rata basis up to 12% growth rates. No additional incentive compensation will be awarded for TSR or ROTDE growth rates exceeding 12%."

 

 

Is this plan an improvement over the old one?

 

Does everyone agree this is a low bar?

 

How much should we read into this as an indication of insufficient management quality?

 

Or it could just be the board's acknowledgement that the business environment for the current set of business is very hard such that achieving these targets is considered an achievement.  The best of breed in the space GS, or JPM are not trading much above tangible book...

[scorpioncapital]

They are hedging their (compensation) bets. Already ROTDE is about 4% so they will get some payout regardless of what TSR (share price) does, "When determining whether RSUs will vest, the calculation will be weighted equally between TSR and ROTDE. For example, if TSR growth was below minimum thresholds, but ROTDE growth was above minimum thresholds, our Executives would still be eligible to receive some number of vested RSUs based on ROTDE growth."

 

So essentially the minimum payout is for a 4% ROE which is currently achieved in 2015 and almost certain in 2016 and I'd wager the same in 2017 and 2018 as a baseline. It's an easy way to make a living I agree. The stock could tank another 25% and they'd still get paid just by trudging along at a very low ROE.

 

The locked vesting looks like a retirement plan they can cash out after 2022.

All in all, very cozy.

 

(I still have no idea how luk makes their money after reading the 10-k. Or rather, I see lots of financial assets, moving parts, exciting ventures, but no roadmap from A to B. Are they throwing spaghetti at the ceiling and hoping something sticks?)

 

 

 

 

[jay21]

How do they not buy stock at these levels?

 

They are in a tough spot and need to get some really good deals like FXCM to move the needle and reposition their asset base to better businesses. Maybe the cattle cycle finally turns this year but I dont see hope for JEF earning good returns on equity in the near future.

[Jurgis]

They should sell some bonds to the cattle. Or some cattle to bond traders. Synergies.

[thepupil]

How do they not buy stock at these levels?

 

n November 2012, our Board of Directors authorized a share repurchase program pursuant to which we may, from time to time, purchase up to an aggregate of 25,000,000 of our common shares, inclusive of prior authorizations.  During 2015, we repurchased a total of 4,295,194 shares pursuant to this program.

 

they are buying stock. not too much, but I expect them to ramp that up. I think we'll see some kind of action with HRG in the next year or so...what exactly, i don't know. Once F,G&L deal closes, that will be a net cash entity with almost all value in SPB. LUK has done so terribly that I can't imagine they'll just sit there with that big liquid monetizable holdco that has no real reason to exist.

 

my main problem with the comp plan is that Handler makes a ton of money pulling relatively easy levers. the "tangible deployable book" figure is pretty low.

 

think about the returns on tangible deployable book Berkadia generates ((40% (78/190)) or NB will generate if the cycle turns (X/$45MM). Homefed's market value is worth more than tangible book today.

 

in the end, it doesn't make me change my thinking on the investment, but it's a bit annoying that management gets credit for impairments of mistakes past. it's like not having a high watermark (like TFG). Whether handler makes $0 or $30MM really doesn't matter to me though.

 

we are almost at a valuation and duration of underperformance that a simple, activist proposal involving simplification/partial liquidation/re-cap would probably be entertained by shareholders. loyalty has its limits.

 

[jay21]

I was looking at the 4th qtr where I didnt see any purchases disclosed in their table. Could have missed something.

[scorpioncapital]

part ii, page 24. purchased ~200k at $16.99/share.

 

I've noticed sometimes companies in q4 press release also say what they bought in the first 2 months of the next year but maybe Handler is waiting to surprise everyone with Q1 2016 press release.

 

[jay21]

part ii, page 24. purchased ~200k at $16.99/share.

 

I've noticed sometimes companies in q4 press release also say what they bought in the first 2 months of the next year but maybe Handler is waiting to surprise everyone with Q1 2016 press release.

 

"Separately, during the three months ended December 31, 2015, we repurchased an aggregate of 239,681 shares in connection with our share compensation plans which allow participants to use shares to satisfy certain tax liabilities arising from the vesting of restricted shares and the distribution of restricted share units."

 

Not part of the repurchase plan.

[plato1976]

is LUK worth its tangible book value?

 

part ii, page 24. purchased ~200k at $16.99/share.

 

I've noticed sometimes companies in q4 press release also say what they bought in the first 2 months of the next year but maybe Handler is waiting to surprise everyone with Q1 2016 press release.

 

"Separately, during the three months ended December 31, 2015, we repurchased an aggregate of 239,681 shares in connection with our share compensation plans which allow participants to use shares to satisfy certain tax liabilities arising from the vesting of restricted shares and the distribution of restricted share units."

 

Not part of the repurchase plan.

[HJ]

If all you are getting is 4% ROE, probably not.

is LUK worth its tangible book value?

 

part ii, page 24. purchased ~200k at $16.99/share.

 

I've noticed sometimes companies in q4 press release also say what they bought in the first 2 months of the next year but maybe Handler is waiting to surprise everyone with Q1 2016 press release.

 

"Separately, during the three months ended December 31, 2015, we repurchased an aggregate of 239,681 shares in connection with our share compensation plans which allow participants to use shares to satisfy certain tax liabilities arising from the vesting of restricted shares and the distribution of restricted share units."

 

Not part of the repurchase plan.

[plato1976]

Then let's liquidate this company

 

If all you are getting is 4% ROE, probably not.

is LUK worth its tangible book value?

 

part ii, page 24. purchased ~200k at $16.99/share.

 

I've noticed sometimes companies in q4 press release also say what they bought in the first 2 months of the next year but maybe Handler is waiting to surprise everyone with Q1 2016 press release.

 

"Separately, during the three months ended December 31, 2015, we repurchased an aggregate of 239,681 shares in connection with our share compensation plans which allow participants to use shares to satisfy certain tax liabilities arising from the vesting of restricted shares and the distribution of restricted share units."

 

Not part of the repurchase plan.

[scorpioncapital]

I think we'd need the Vanguard Group or 2-3 of the other top institutional shareholders to get on board to lead this effort and vote together for this since there are common share transfer restrictions due to the NOLs. I don't know what the minimum vote to pass is. They might vote to spin everything off and wind down the holding company. But I notice in the new 10-K that management has "consulted" with their top long-term shareholders on the compensation plan. If those long-term holders advised on what we saw on Friday, I don't hold out much hope for a liquidation as it sounds like they are angling more for minor tweaks around the edges.

 

While this article is about Loews, I think it applies to Luk as well - http://www.rationalwalk.com/?p=14143

 

"The stock market is often wrong but when a condition persists for many years it is incumbent upon observers to consider whether the market’s assessment might have merit."

 

"Despite repurchasing a large number of shares at discounts to book value in recent years (which is immediately accretive to book value), Loews has experienced sluggish book value growth.  Book value stood at $51.67 per share on December 31, 2015 and has compounded at a rather anemic 3 percent rate over the past five years.  Loews trades at only 71 percent of book value which reflects the market’s assessment of sluggish book value growth in the future.  Arguably a firm heavily exposed to insurance that cannot grow book value beyond the low single digits does not deserve to trade at or above book value."

 

I see LUK as being in an almost identical situation - poor execution, bad collection of businesses with a few good ones that are overshadowed by the whole ("diworsification"), perpetual discount, low growth of BV, and maybe somewhat apathetic, revolving door shareholder bloc.

 

An alternative to liquidation would be internal liquidation to raise cash (a few spinoffs of the jewels), followed by a major share repurchase of the holding company. This might be more practical in the absence of finding actual buyers. Still, I suspect everyone at head office is using the hope strategy, hope that ROE is at a cyclical low everywhere and will revert to the mean. But do they know what is in their control and what isn't? For example, several peers like GS and MS have had 7% or higher ROE since the crisis so the claim that the environment is difficult is only 50% true.

 

 

 

[Spekulatius]

How do they not buy stock at these levels?

 

n November 2012, our Board of Directors authorized a share repurchase program pursuant to which we may, from time to time, purchase up to an aggregate of 25,000,000 of our common shares, inclusive of prior authorizations.  During 2015, we repurchased a total of 4,295,194 shares pursuant to this program.

 

they are buying stock. not too much, but I expect them to ramp that up. I think we'll see some kind of action with HRG in the next year or so...what exactly, i don't know. Once F,G&L deal closes, that will be a net cash entity with almost all value in SPB. LUK has done so terribly that I can't imagine they'll just sit there with that big liquid monetizable holdco that has no real reason to exist.

 

my main problem with the comp plan is that Handler makes a ton of money pulling relatively easy levers. the "tangible deployable book" figure is pretty low.

 

think about the returns on tangible deployable book Berkadia generates ((40% (78/190)) or NB will generate if the cycle turns (X/$45MM). Homefed's market value is worth more than tangible book today.

 

in the end, it doesn't make me change my thinking on the investment, but it's a bit annoying that management gets credit for impairments of mistakes past. it's like not having a high watermark (like TFG). Whether handler makes $0 or $30MM really doesn't matter to me though.

 

we are almost at a valuation and duration of underperformance that a simple, activist proposal involving simplification/partial liquidation/re-cap would probably be entertained by shareholders. loyalty has its limits.

 

I think it would be better to buy back the bonds. That's an almost 9% guaranteed return on investment for 20+ years. Hard to beat if you have excess cash in the balance sheet.

[thepupil]

 

I think it would be better to buy back the bonds. That's an almost 9% guaranteed return on investment for 20+ years. Hard to beat if you have excess cash in the balance sheet.

 

it's only a $250MM issue. while I agree with you, the liquidity might make it difficult to buy a meaningful amount.

[scorpioncapital]

annual letter - http://leucadia.com/c-p_letters/leucadia_2015_shareholders_letter.pdf

 

[MrB]

Long term P/BV attached

 

P.S. P/TBV will be about 25% higher (including DTAs in TBV)

 

If not now? When??

[WneverLOSE]

(Disclosure : I don't know what I am talking about and you should never listen to me without doing your own research, I probably have many mistakes in this comment and please point them out to me :), thanks)

 

Looking at historical valuation for companies such as KO can be very useful but I don't think this is the case with LUK

 

1) LUK today is very different from LUK in 1981, the business mix is all different and if I am not mistaken the only business that is still around from that era is Conwed, all other business were added later and may deserve a higher or lower valuation from the previous businesses that called leucadia home.

 

2) Since the end of 2012 LUK is basically a financial company with jefferies being by far the largest holding with tangible equity of 3.6B.

Jefferies makes money using 2 main areas : Investment banking (Advisory, bookrunning, M&A and so on), this segment should be valued as Return On Employees because of the fact that the amount of assets Jefferies have doesn't have a major role in the decision process of a customer whether to chose Jefferies, Houlihan Lokey or Goldman Sachs. When it comes down to Trading, Jefferies does make money on its Assets by using leverage. As warren buffett said about banks, any bank that has a ROA less than 1% will eventually sell below tangible book value. and that is the case with Jefferies, it currently earns 0.6% ROA and 4% ROE compare this to GS that earns 0.6% ROA and 7.4% ROE and is selling at 0.86 P/BV.

Jefferies historically sold for 1.5 P/BV while earning ~3.5% ROA and ~12.5% ROE.

 

My personal opinion is that JEF should have a premium over GS. The current price doesn't reflect this and assumes JEF is a worse business than GS. I think that at this very attractive entry point you pay as if JEF is much worse than GS, National beef will never turn around and other business will never be profitable, I think this is insane.

 

One question I have for this board is : why do you think that JEF can do in order to improve their ROA ? What market conditions are required for them to come back to above 1.5% ROA ?

[ATLValue]

Why should Jefferies be more valuable thank Goldman? Goldman is consistently making much more money than Jefferies AND they are too big to fail. Jefferies would be allowed to fail in a crisis.

 

I agree with your general point though LUK today is much different than it was in the past

[petec]

My personal opinion is that JEF should have a premium over GS. The current price doesn't reflect this and assumes JEF is a worse business than GS. I think that at this very attractive entry point you pay as if JEF is much worse than GS, National beef will never turn around and other business will never be profitable, I think this is insane.

 

Agreed!

 

One question I have for this board is : why do you think that JEF can do in order to improve their ROA ? What market conditions are required for them to come back to above 1.5% ROA ?

 

Whole range of things!

- more cows so they can sell National Beef well - likely a matter of time.

- commodity upside so Vitesse, Juneau, and the Jefferies energy business can recover.  I think this is a matter of time.

- Golden Queen first pour (March) and solidly profitable year 1 so they can sell this at a profit/get a good cash yield.  Likely a matter of time.

- Work through the value capture at HRG - selling Fidelity, simplifying structure.  Likely a matter of time?

- Recoup all the debt at FXCM and have the profit share become evident/sell it.  Likely a matter of time.

- Sales out of Homefed - likely a matter of time.

 

Now, there is also plenty that could go wrong.  Mainly, they might not figure out a way to get Jefferies back to its old profitability levels.  Equally, they might.  I also worry about credit risk at Foresight and Chrome, and over-earning at Garcadia and Berkadia.  I don't fully understand these businesses and would appreciate being pointed to any good sources.

 

But, my suspicion is that a lot of value is created here simply by waiting and allowing clever people to extract value from some almost certainly undervalued assets.

 

What would not be good is an economic collapse, so I hedge this with Fairfax ;)

 

P

 

[handycap5]

what would you guess the total return for LUK is over the last 10 years? -30%. How about last 15? +70% (3.6% CAGR). given joe and ian's reputations, I never would have guessed these would be the rear view mirror results...

[ATLValue]

My personal opinion is that JEF should have a premium over GS. The current price doesn't reflect this and assumes JEF is a worse business than GS. I think that at this very attractive entry point you pay as if JEF is much worse than GS, National beef will never turn around and other business will never be profitable, I think this is insane.

 

Agreed!

 

 

Again, why does Jefferies deserve a premium, just because Leucadia is the owner???

[JBTC]

My personal opinion is that JEF should have a premium over GS. The current price doesn't reflect this and assumes JEF is a worse business than GS. I think that at this very attractive entry point you pay as if JEF is much worse than GS, National beef will never turn around and other business will never be profitable, I think this is insane.

 

Agreed!

 

 

Again, why does Jefferies deserve a premium, just because Leucadia is the owner???

 

I am also eagerly waiting for an answer. Just to point out for perhaps a long time JEF was indeed trading at a premium to most banks.

 

Things went south post the financial crisis. One of the things they possibly did wrong was rather than being laser-focused on their solid mid-market niche in the US, they got into commodities via Bache and went into Europe and Asia where they fought against the much bigger players without any differentiation.

 

[scorpioncapital]

LUK looks like a poor man's berkshire (I mean this literally as it so far as tended to make one quite poor!)

 

You want exposure to financials? JEF vs wells fargo, bac, insurance.

You want exposure to commodities? vitesse, beef, juneau, idaho vs ? railroads? phillips 66, kmi..

You want exposure to real estate? berkadia, homefed vs berkshire homeservices, clayton.

You want exposure to industrials? telecom? consumer brands? spectrum, conwed, etc.. vs all of berkshire's quality holdings.

 

On the surface both companies have exposure to some overlapping areas. But how does management optimize each asset they own? I do think LUK has slightly more direct commodity exposure. But the bottom line is that many companies have inflation juicing assets and similar areas of operation, the question is does quality of business in the same fields and a generally similar conglomerate structure = the same kind of performance?

[MrB]

(Disclosure : I don't know what I am talking about and you should never listen to me without doing your own research, I probably have many mistakes in this comment and please point them out to me :), thanks)

 

Looking at historical valuation for companies such as KO can be very useful but I don't think this is the case with LUK

 

1) LUK today is very different from LUK in 1981, the business mix is all different and if I am not mistaken the only business that is still around from that era is Conwed, all other business were added later and may deserve a higher or lower valuation from the previous businesses that called leucadia home.

 

For that chart to have any validity there has to be a consistency in the compounding of underlying value. The way I look at it C&S was that consistency pre Jefferies (JEF). I've looked at LUK for years and in varying degrees of detail, but I always ended up returning to the basic point that you're buying into C&S capital allocation skills. Take the decade leading up to the JEF deal. Up to 2002 banking and lending dominated revenues and this changed every three years first to Network/WilTel, then timber & plastic, telecoms and finally beef. All the while the investment portfolio was as, if not more important and you had a limited ability of forming a good opinion of how that will perform. At least for me, I always ended up with, you either trust C&S to deliver or not.

 

Now if the above carry then you have to ask whether there is sufficient glue to the pre and post JEF deal periods. Firstly JEF and LUK have been doing business since the early 2000's. These guys got to know each other over many years; this was not a shotgun wedding. Secondly, JEF compounded at a similar rate (some would argue higher) to LUK and that performance seems to be because of Handler and Friedman (H&F). 

 

So I'm asking the basic question of whether H&F are as good portfolio managers as C&F? Same hedge fund, different managers and if you have a good memory then you will hope, as do I that H&F provides similar returns with half the excitement that C&F dished up.

 

I'm not saying you should not analyze the underlying businesses you should and we should discuss them here. However, there is no way of modeling deals like FXCM and you cannot replicate those in the public markets, well at least not me. So you will always have an element of relying on the individuals to deliver.

 

So the above chart is a reference, despite the ever changing nature of the horses both historically and in future at Leucadia, because I think the quality of the new jockeys are comparable to the old ones.

 

 

[WneverLOSE]

Hi, I keep reminding you that my knowledge is very limited and you should take my posts with a grain of salts.

 

1) I don't agree that this is a Berkshire for poor people, LUK own some very misunderstood companies.

Berkadia is a great company, 50% joint venture with Berkshire, that lends its own money for middle market mortgages, sell this mortgage while earning a few percentage points and doing the same again. As long as berkadia is honest and able to underwrite mortgages with minimum risk it is a great business. I think it has the same Moats characteristics as any other insurance subsidiary in berkshire (excluding geico). Berkadia has 200B in outstanding servicing principal which gives them a huge tailwind when rates will rise,valuing this company below 12 times EV/EBIT is crazy to me.

 

Conwed is also a great company, world leader in producing plastic nettings, this stuff will be with us for the next 100 years, holding together our oranges at the supermarket, inside the rugs we buy, part of medical bandages and so on. This company keeps growing every year and should get at least 10 time EV/EBIT.

 

National beef is not a great company, but who said you can't make money on medium quality companies ? Buying it in 2011 when its near the bottom of the cuttle cycle and selling it in a few years when it is producing huge amount of money is an "Easy trade" for these guys.

I think national beef is worth 800m and they can sell it for 1B at the top of the cycle.

 

LUK is not a permanent home for companies as berkshire is. they buy them, fix them, sell them (now more invest than outright buy).

I think that when having smaller amounts of money, buying those types of businesses can be more profitable(and buffett agrees).

 

2) Investment banks are in the business of leverage, they employee people that each day they analyze companies and write research papers on them. These companies let their employees use the company money and invest it in their ideas (mostly small traded and not full time investments) and your paycheck will be directly influenced by your performance (compensation ratio).

 

In 2008, all major Investment Banks(IB) started falling apart. Most of them were bought by a bank holding company or they became one themselves. This is a very bad idea for a IB, since being a bank holding company restrict your ability to leverage up.

 

Investment banking is a wonderful business if you can resist the temptation to over leverage, something that all the competitors couldn't do.

During 2007, most of the banks had Leverage ratio of over 20 and GS had been leverd 25 times its equity. This amount is excessive but JEF was much more conservative with only 16 times Debt/Equity, one of the lowest leverage ratios in wall street.

When things turnaround in 5, 10, 20 years JEF will be able to use its leverage to extract much better ROE then GS.

GS grew revenue from 1998 to 2011 at 3.15% while JEF did 12%.

Since 2007 GS had revenue decrease of -11.3% while JEF had "only" -1.2% CAGR decrease.

I don't see why JEF shouldn't have a premium over GS.

JEF is a better business with better employees, they are not restricted in the leverage the take (which is essential to Investment banks) they are much more conservative and the last financial crises showed it.

 

LUK is definitely much more risky investment than BRK is. no one is making any comparison. But I do think that LUK is undervalued and its assets are hugely misunderstood. Let's put it this way, at 0.8 BV I will put BRK as a 100% position in my portfolio while at no price I will put LUK a 100% position but a 10-20% one ? I will.