JEF - Jefferies Group

[txlaw]

Jefferies starting to look interesting again.

[racemize]

Jefferies starting to look interesting again.

 

It has pulled LUK down as well--almost back to my last buy-in price.

[Grenville]

Jefferies starting to look interesting again.

 

It's nice to see Jefferies bonds holding up much better this time around. A good sign for the equity.

[txlaw]

Jefferies starting to look interesting again.

 

It's nice to see Jefferies bonds holding up much better this time around. A good sign for the equity.

 

I'd like to think so.

 

Interesting to see JEF be the syndication agent for these high profile high yield loans.  First the Harbinger loan.  Now CHK.

[txlaw]

Also, if you believe there will be a lot of M&A in the O&G space, as I believe there will be due to low nat gas prices and leveraged companies (such as CHK), Jefferies will certainly benefit from that increased activity.

 

Let's not forget the recent Samson-KKR deal, as well as the XOM-XTO deal.

[Liberty]

Getting really cheap again.

[racemize]

yep, though I doubt they are under book now given jef's decline.  Only 1% above my buy in now.

[tombgrt]

Irrelevant if you believe JEF is worth more of course. BV going down $1-2 because an undervalued holding drops further doesn't really affect the instrinsic value of LUK of course.  You can buy at 1.1xBV because it's holdings drop more in BV than LUK's shares but get a better deal than at 0.9x after everything ran up.

I'm quite sure it's under BV now tho.

[glider3834]

In any case, current share price is under BV again. Guessing something of 0.9x not adjusting for DTA and FMG note. I have been looking to buy more but haven't pulled the trigger yet because it's such a big position already.

 

Reread some annual letters in anticipating of the new one this week or the next. More details on succession plan on the way? We'll see!

 

 

Our Board of Directors continues to urge us to provide a succession plan. We have been

working hard on that problem for several years. We have made some progress and hope by next

year it will be more palpable.

 

You can't really teach what they do.  And the stuff they buy isn't as straight forward as the businesses Berkshire, Markel or Fairfax buy where there is management in place and they are businesses that are working just fine.  Succession is going to be very difficult at Leucadia if both are gone.  Cheers!

 

I agree with Sanjeev. I think you do need to build in a decent margin a safety in buying Leucadia National - I would approach it from the point of view , if Ian Cumming & Joseph Steinberg were not there tomorrow would I still make a nice return & if they do stay for a 3 years or more am I going to make a lot of money? I recently had an experience with Guinness Peat Group (GPG.AX). This listed investment company was formerly run by Ron Brierley & Gary Weiss who achieved extremely high mid digit compounded BVPS growth  and they were removed by a group of short sighted institutional investors in Australia & NZ who are now liquidating the company. Ron Brierley was close to retirement but these institutions no doubt accelerated his departure. The loss of these key people in my mind did materially change my valuation of Guinness Peat and the steal I thought I had bought at a 30% + discount to NTAV turned out to be a disappointing outcome.

 

 

[scorpioncapital]

Never mind an expanding coupon yield on investment, but JEF is currently trading at close to a 10% *initial* yield. They are earning in the ballpark of $275 million per year and at 2.8 billion market cap are giving an investor a juicy starting return. Even the slightest growth can mean an expanding equity coupon. Sure beats owning a bond with a fixed rate. I suspect that JEF's weakness is partially tied into the JPM fiasco. Remember when MF global went bankrupt? Same thing.

[txlaw]

http://www.businessweek.com/news/2012-05-15/chesapeake-oil-asset-may-fetch-an-extra-billion-energy

 

In addition to originating a $4 billion "bridge loan" to CHK, JEF and GS are advising CHK on the Permian asset sales, and probably other divestitures as well.

[Kiltacular]

I attended the Leucadia shareholder meeting today. 

 

I took some rough notes though much of what I'll write is from memory and/or general feeling. 

 

I also got a chance to listen to the guys running Nat'l Beef in a small group.  As well as a chance to listen to Justin Wheeler (an heir apparent to Cummings) in a small group. 

 

So, I'll just throw things in generally (anyone else that was there feel free to add your impression or correct).

 

I thought a few things seemed pretty important comments:

 

On Fortescue note:  Cummings: "I'll be appalled if we don't win!!" 

 

Steinberg does a sort of Munger: Nothing to add -- clear he felt the same way.

 

On the overall Leucadia portfolio:  Steinberg: "Portfolio of companies at Leucadia is a bet on inflation...If you don't agree with outlook, you should sell your shares."

 

                                                  Steinberg likes gold / Cummings likes farmland  (my note: together they equal Michael Burry from a few years ago.)

 

                Steinberg was pretty adamant that he felt the only way out of this mess was more money printing.  Cummings was somewhat generally negative: "It is scary out there."

 

                They want to build this fortress Leucadia and Wheeler, IIRC, said in my group that they sold their Fortescue common because they wanted to reduce debt.  May reduce debt further.

 

--

 

They had Justin Wheeler review a bunch of the portfolio (I'll also include here some of what I picked up in my small group sessions):

 

(1) Nat'l Beef: 

 

(a) Bet on Global protein demand long term 

(b) Best out of the four remaining large players

© possibility to de-comiditize a commodity product (I believe through branding over time?)  (d) in their due diligence, they came up with three possible downsides...Mad Cow, competitors doing stupid things, social media against beef (I lost some of this point but I think the idea was the pretty much right away Mad Cow and Pink Slime happened but no big deal -- perhaps someone else can refine this.)

 

(in my small group, the guys running Nat'l said that this business is down to four competitors and that the U.S. has grain fed beef [as compared to grass fed in S. America] and this beef is attractive in Asia -- more marbled than S. American beef and that the Hereford and one other type of cattle that produce more marbling do better in N. America. 

 

They think the Chinese market will eventually open up -- could be relatively soon -- but is a long-term bet anyway.  Said that the Chinese have a huge runway to grow beef consumption. 

 

They said that Leucadia approached them and the courtship went on for some time and trust eventually built up.  They were not looking to sell.  In fact, they kept a good sized interest in the business. )

 

(2)  Garcadia (car dealerships): 

                    It is currently experiencing a "Perfect POSITIVE storm".  Lots of competition is gone because of the last few years.  Sales per location are up.  Wheeler said that this business is kind of a razor / razor blade thing.  The manufacturers bear the risk on the cars and, in effect, supply the razors.  The dealer makes it's money on the blades (which aren't the cars themselves) but rather the rest of the business -- maintenance, repairs and parts, auto body, etc.

 

(3)  Berkadia (servicing partnership with Berkshire):

                      Worst case scenario was that this business was going to be a "melting ice cube".  But, it looks like it will be better than that.  The independent commercial servicing business is doing well -- buy loans on apartments, sell them to the feds, keep the servicing.  They recently bought a portfolio from Key Bank with 5,000 accounts.

 

(my notes get flakier after this...)

 

(4)  Mueller

                      Makes things people need to buy (I got the feeling this was like Berkshire's Mi-Tek).  Will do better when construction and economy recover.  There's been industry consolidation.  Focussed on efficiences (I think this was reducing expenses).

 

(5)  Keen Energy

                      Continues to make money.  Cash flow positive.  Day rates fluctuate, etc.

 

(6)  Idaho Timber

                      Best quarter in 4 years.

 

(7)  Crimson (wine)

                      Very happy with new acquisition Seghesio.  Should give them scale / size / reach in the wine industry.

 

"eight":  Sangart

                      Phase 2b trials going on now.  This one has a bi-modal outcome  (either a home run or a failure is my take).

 

(9)  Casino

                      Has 99% occupancy.  Considering adding rooms to increase casino take -- standard casino model.

 

--

 

There was then a Q&A that Cummings led (some of that is already covered above).

 

Cummings said he wanted to retire at 75 to spend some time in business with his sons.  Steinberg was non-commital but I got the feeling he is not going anywhere soon.  I also got the feeling that Wheeler is really supposed to replace Cummings as the jocular / charismatic part of Leucadia.  Wheeler, though, is clearly also heavily involved in these businesses as I'm sure that Cummings always was / is.  I just feel that Steinberg doens't want to be out front. 

 

Cummings said they look for a 15% pre-tax return "and hopefully much larger" (and haven't paid much federal tax in the last 30+ years).

 

Steinberg said that Mueller, Berkadia, Jefferies, Idaho timber will all do well with inflation.  Said that he would be "happy" if Leucadia could keep up in a high inflation world -- this in response to a question about Buffett's old article "How Inflation Swindles the Equity Investor".

 

Cummings said that going to Harvard business school was a "ticket" (more than necessarily good for what you might or might not learn).

 

In my small group, Wheeler indicated that they look at a huge number of deals in a year and only pick a few: "Most go right into the trash." 

 

The Q&A didn't last that long but I'm leaving some things out.  As I said, anyone else feel free to add.

 

 

[biaggio]

Kiltacular, thank you very much for posting!

 

What did you think of Wheeler, overall as  heir apparent?

[Kiltacular]

Biaggio,

I liked Wheeler quite a bit in the small group.  Not a promotional type at all.  At one point, someone asked him in this small group how it felt to be the center of attention now?  He actually sort of blushed.  Hard to describe but he gave the right feeling and said that he wasn't there yet but that he enjoys his role, etc.  He's from a small town and seems to combine a small town attitude with a good bit of worldly insight in business. 

 

He was well versed in all the businesses and said something like "We looked at 3,000 ideas last year".  I think I sort of blurted out something like "Jesus!"  (Please don't let that start another thread on religion !!).  Anyway, he said: "Most go right into the trash."  I liked his response -- he was sort of saying: "Oopps...I didn't mean to make it sound like I was bragging".

 

Still, it was interesting and I got the feeling he's looking at all of them with the team and that they're giving him some serious experience.  I also realized that sellers / promoters (whatever) are bringing Leucadia tons of stuff to look at -- that can't be a bad thing. 

 

Overall, I would say that at this point, I think Wheeler is very good based on these impressions.  Obviously, we can't know for sure until much later.  But, given that Cummings isn't going anywhere for three years and I think / got the feeling that at this point Steinberg will stay longer, they seem to be setting things up very intelligently.

 

In fact, in the Q&A, Cummings said something about how, ultimately, you go with your feeling when you're doing a deal and I think if that's the case, Wheeler is getting a very good chance to see how that works and how to develop the right "gut" response when all is said and done.  (Naturally, a guy like Cummings isn't just shooting form the hip on acquisitions but it was more a "after it passes all the filters" -- I think most investors can relate but you want experience in a guy that is going to be taking over eventually).

 

I hope Wheeler works out.

[WarrenWatsa]

Kiltacular,

 

As a fellow LUK shareholder who couldn't attend the meeting, I join others here in thanking you for sharing all of your thoughts.

[scorpioncapital]

What do people think about the idea that LUK is a play on inflation and if inflation is long-delayed or does not materialize in any significant fashion, the stock will languish for quite a while?

[racemize]

What do people think about the idea that LUK is a play on inflation and if inflation is long-delayed or does not materialize in any significant fashion, the stock will languish for quite a while?

 

I think it is certainly a possibility.  I'm slightly in the deflation camp, but feel like my relatively small holding in LUK hedges my uncertainty (I have more in FFH).

[scorpioncapital]

Found this quote from Philip Fisher,

 

"Philip Fisher on inevitable bond-killing inflation following a recession

 

What is really important concerning the attractiveness of bonds as long-term investments is whether a similar trend can be expected in the period ahead. It seems to me that if this whole inflation mechanism is studied carefully it becomes clear that major inflationary spurts arise out of wholesale expansions of credit, which in turn result from large government deficits greatly enlarging the monetary base of the credit system. The huge deficit incurred in winning World War II laid such a base. The result was that prewar bondholders who have maintained their positions in fixed-income securities have lost over half the real value of their investments.

 

As already explained, our laws, and more importantly our accepted beliefs of what should be done in a depression, make one of two courses seem inevitable. Either business will remain good, in which event outstanding stocks will continue to out-perform bonds, or a significant recession will occur. If this happens, bonds should temporarily outperform the best stocks, but a train of major deficit-producing actions will then be triggered that will cause another major decline in the true purchasing power of bond-type investments. It is almost certain that a depression will produce further major inflation; the extreme difficulty of determining when in such a disturbing period bonds should be sold makes me believes that securities of this type are, in our complex economy, primarily suited either to banks, insurance companies and other institutions that have dollar obligations to offset against them, or to individuals with short-term objectives. They do not provide for sufficient gain to the long-term investor to offset this probability of further depreciation in purchasing power.

"

 

[txlaw]

Found this quote from Philip Fisher,

 

"Philip Fisher on inevitable bond-killing inflation following a recession

 

What is really important concerning the attractiveness of bonds as long-term investments is whether a similar trend can be expected in the period ahead. It seems to me that if this whole inflation mechanism is studied carefully it becomes clear that major inflationary spurts arise out of wholesale expansions of credit, which in turn result from large government deficits greatly enlarging the monetary base of the credit system. The huge deficit incurred in winning World War II laid such a base. The result was that prewar bondholders who have maintained their positions in fixed-income securities have lost over half the real value of their investments.

 

As already explained, our laws, and more importantly our accepted beliefs of what should be done in a depression, make one of two courses seem inevitable. Either business will remain good, in which event outstanding stocks will continue to out-perform bonds, or a significant recession will occur. If this happens, bonds should temporarily outperform the best stocks, but a train of major deficit-producing actions will then be triggered that will cause another major decline in the true purchasing power of bond-type investments. It is almost certain that a depression will produce further major inflation; the extreme difficulty of determining when in such a disturbing period bonds should be sold makes me believes that securities of this type are, in our complex economy, primarily suited either to banks, insurance companies and other institutions that have dollar obligations to offset against them, or to individuals with short-term objectives. They do not provide for sufficient gain to the long-term investor to offset this probability of further depreciation in purchasing power.

"

 

Fisher's thoughts on inflation may very well have been the biggest influence on WEB's views on inflation and equities.

 

As for LUK, it's unclear whether the stock will languish over the short term due to deflationary pressures.  It could go further down if commodities get slammed. 

[Grenville]

Article on Jefferies growth in energy and deals with Chesapeake:

 

"Chesapeake Turns To Jefferies’ Eads In $28 Billion Deals: Energy"

http://www.bloomberg.com/news/2012-05-17/chesapeake-turns-to-jefferies-eads-in-28-billion-deals-energy.html

[racemize]

moving this over from the other thread:

 

I would like to get some of your thoughts on LUK at these levels. Quite amazing to see the steep fall in value over the past few months.

 

Any thoughts on where BV might currently be?

 

Personally, I am buying hand over fist at these levels. LUK has never let me down over a 6-12 month horizon.

 

Scott

 

I'm now down 10% from my buy in last year, which I thought was historically cheap as well.  Not sure what book value is with mark to market (e.g., based on JEF), but JEF seems undervalued now as well, so I'm not too concerned. 

 

My main issue, though, is that their commodities bets may have issues.  e.g., see Prem's comments re China/commodities.

 

[ShahKhezri]

I think JEF's market position has improved because of MS's fall.

 

I own LUK, only 40% of the position I want, will add more.

[WarrenWatsa]

I note that in 2010 it got down to the low $17s, near its Oct. 2008 low.

 

It's very cheap. I wonder how much of this drop has to do with succession concerns, and not just the cyclical nature of LUK (or the fact that it's not easy to value).

[Parsad]

I note that in 2010 it got down to the low $17s, near its Oct. 2008 low.

 

It's very cheap. I wonder how much of this drop has to do with succession concerns, and not just the cyclical nature of LUK (or the fact that it's not easy to value).

 

Not a whole lot.  I think it's more to do with the movement in Jefferies price and then commodity prices.  Right now, it seems it is moving almost directly with Jefferies.  Cheers!

[PlanMaestro]

Open letter posted on Jefferies website from management to clients, shareholders, etc.

 

http://www.jefco.com/html/OurFirm/NewsRoom/PressReleases/2011/JefGrp_Letter%20to%20Shareholders.pdf

 

The letter is not in the site. Does anyone have a copy?