JEF - Jefferies Group

[Parsad]

from Tweedy's last AR:

 

We also pared back our positions in Google, Henkel, Leucadia, Unifirst, Wal-Mart, and Sysco, all of which were trading at, or getting nearer to, estimated intrinsic value.

 

I don´t really get that...LUK went as high as 32 around the merger, now they are around 25.60 and I for one am pretty satisfied with what they have been doing in the mean time.

 

Tweedy is well off what LUK's intrinsic value is.  I wouldn't pay attention.  Cheers!

[Spekulatius]

Tweedy is well off what LUK's intrinsic value is.  I wouldn't pay attention.  Cheers

 

I think the Jeffries reverse takeover made the stock less interesting. I owned some LUK but sold when the Jeffries merger was annouced. National Beef did not work out. I don't know how to value Lake Charles and the Oregon LNG terminal and my concern was and still is, that these could become huge money pits, because I think that LUK does not have the expertise to really manage such huge projects. I know the idea is to partner but even though, I still think they are risky and current NPV us close to zero.

 

If these projects come to pass with good economics, they could be a gamechanger.

[Parsad]

Tweedy is well off what LUK's intrinsic value is.  I wouldn't pay attention.  Cheers

 

I think the Jeffries reverse takeover made the stock less interesting. I owned somd LUK but sold when the Jeffries merger was annouced. National Beef did not work out. I don't know how to value Lake Charles and the Oregon LNG terminal and my concern was and still is, that these could become huge money pits, because I think that LUK does not have the expertise to really manage such huge projects. I know the idea is to partner but even though, I still think they are risky and current NPV us close to zero.

 

If these projects come to pass with good economics, they could be a gamechanger.

 

I think the Jefferies deal is one of the smartest deals they ever pulled.  It resolved a number of issues, while allowing them to acquire the best mid-tier investment bank in the industry for a very fair price.  The value of which won't appear probably for another 5-10 years.  Cheers!

[matjone]

I think valuing this is way out of my league,  but I decided to buy some during the merger because it seemed like I could get a good deal on LUK by buying JEF and then I'd just let Cumming/Steinberg work their magic.  Alright, that didn't work out but Handler's record is impressive and I am going to let it ride, and in fact I'm tempted to buy more. 

 

LUK is at 90% of book and just glancing at their report and looking what these businesses are earning  it seems like they like to carry things conservatively on their balance sheet. They haven't made much on national beef so far, but I think it's too soon to judge whether that was a smart deal or not.  They have said it is the toughest time in the last decade for beef processing, and they are earning a really small margin.  Tyson says earning a 2.5%-4.5% margin on beef processing is a reasonable expectation.  If that happens then national beef may turn out to be a good deal after all.

[scorpioncapital]

Oregon LNG is a big maybe. No ferc approval yet, and no construction till at least 2015-2016. I would consider it zero for now, those Oregon environmentalists are extremely confrontational about protecting Nature.

 

Lake Charles is in my mind a done deal. Financial closing and the $500m investment is imminent this year although I hear an echo of Greenspan who said that boards are reluctant to approve ready to go long term capital investments if they can't know future tax rates and the inflation environment. Investment in long lived assets is not paying off (that is why Greenspan believes we are nowhere close to a bubble - bubbles form when all is well with the world. That 20-30 year assets are not being invested in suggests a dysfunctional market, hence no bubble)

 

Even if you earn 10% on your $8.5 billion of tangible equity, that's $2.3/share being added each year. I see IV at $35/share without much excitement happening. Pretty much everything LUK owns is pretty cyclical. I can't think of one business that isn't. Cyclical businesses are up and down. It's no Berkshire. National Beef is down. Jefferies is down too (most investment banks are down, returning hardly 10% on equity). It would be best to read up on how to value cyclical businesses because that is what we have here ...plus a few new projects. Now what I want to understand is compensation in cyclical companies. It seems LUK is paying as if it assumes an average over the cycle because one can't justify such high compensation during the low parts and I think this is evidenced by the large block of 'no' votes for a compensation-related vote at the latest AGM.

 

[Spekulatius]

Yes, LUK for me is an investment bank with some mostly mediocre business attached to it, trading at 1.1 x tangible book.

 

That is roughly the same multiple than GS is trading at, but GS has a lower PE and probably is a better franchise than Jeffries. I own a little GS and I think it is the better deal relative to LUK.

[bookie71]

I had been in LUK for many years, but since the merger, I just didn't feel comfortable so I closed out my position.

[jay21]

Pretty much everything LUK owns is pretty cyclical. I can't think of one business that isn't. Cyclical businesses are up and down. It's no Berkshire. National Beef is down. Jefferies is down too (most investment banks are down, returning hardly 10% on equity). It would be best to read up on how to value cyclical businesses because that is what we have here ...plus a few new projects. Now what I want to understand is compensation in cyclical companies. It seems LUK is paying as if it assumes an average over the cycle because one can't justify such high compensation during the low parts and I think this is evidenced by the large block of 'no' votes for a compensation-related vote at the latest AGM.

 

This is close to how I see LUK.  A lot of these businesses can earn significantly more than what they currently are.

 

There are quite a few reasons why I got comfortable with LUK after the merger:

 

1. JEF bought back stock and debt during the rating agency situation

2. Knight Capital

3. Harbinger

4. All 3 above were lead by JEF people

5. JEF was instrumental in fortescue

6. Berkadia and Garcadia - they don't move the needle but were incredibly smart and are doing well. 

7. >$2b to deploy

[scorpioncapital]

Now if I had only invested in BAM...5x the return of LUK over last 5 years and 4x over 10 years, all in similar fields, real estate, energy, asset management, resources.

[matjone]

I was looking the other day at these holding company stocks with good track records and seeing how you would have done buying at book, sitting for 10 yrs, and then selling at book. BAM was by far the best of the ones I looked at, but they all did relatively well.

 

The interesting thing to me is that you could put together a portfolio of these things today and most of them are reasonably close to BV.  I could just buy them and sit on them and feel safe, and incur zero costs doing so.  Maybe Gio has the right idea with this strategy.

[plato1976]

Are we sure this down cycle of investment bank purely cyclical or somehow structural?

 

Pretty much everything LUK owns is pretty cyclical. I can't think of one business that isn't. Cyclical businesses are up and down. It's no Berkshire. National Beef is down. Jefferies is down too (most investment banks are down, returning hardly 10% on equity). It would be best to read up on how to value cyclical businesses because that is what we have here ...plus a few new projects. Now what I want to understand is compensation in cyclical companies. It seems LUK is paying as if it assumes an average over the cycle because one can't justify such high compensation during the low parts and I think this is evidenced by the large block of 'no' votes for a compensation-related vote at the latest AGM.

 

This is close to how I see LUK.  A lot of these businesses can earn significantly more than what they currently are.

 

There are quite a few reasons why I got comfortable with LUK after the merger:

 

1. JEF bought back stock and debt during the rating agency situation

2. Knight Capital

3. Harbinger

4. All 3 above were lead by JEF people

5. JEF was instrumental in fortescue

6. Berkadia and Garcadia - they don't move the needle but were incredibly smart and are doing well. 

7. >$2b to deploy

[VersaillesinNY]

I attended the Leucadia annual meeting a couple weeks ago. I didn't take many notes because I believed that the Brooklyn Investor (Blog) would post his. Pardon the poor quality of my recollections and comments. They should not be relied upon.

 

This year’s meeting took place at the Axa auditorium midtown Manhattan. Joe Steinberg, Richard Handler and Brian Friedman were on stage while the other Board members were sitting on the front row. Leucadia's primarily male Board of Directors finally includes one female and one Afro-American. Board diversity in corporate America is in progress.

 

Meeting slides

 

http://www.sec.gov/Archives/edgar/data/96223/000119312514195955/d728050dex99.htm

 

History

 

Joe Steinberg reminded us that the company was founded in 1854 in Connecticut as a factory selling to the U.S. Army. In 1979 Talcott National manufacturing business was sold when Ian and Joe took control. More on the topic:

http://www.fundinguniverse.com/company-histories/leucadia-national-corporation-history/

 

Leucadia is now a holding company with an entrepreneurial spirit.

 

Richard Handler’s comments

 

- We like strategic partners, we have dry power. Every 3-5 years we face extreme dislocations on the market. We like to keep cash for opportunities.

- We see opportunities on Oil & Gas projects. We now own 20.1% Harbinger with Joint Ventures such as Exco ressources.

- JEF increased its ownership in Homefed to 65 %. There is a lot of value in real estate assets.

- Berkadia now has 700 employees in India.

- Garcadia: US sales of vehicles are as high as 2006.

-  Eventually interest rates will go up.

- We are success fee oriented.

 

Brian Friedman's comments

 

- We have a long term orientation not like private equity firms.

 

Q&A

 

- Can you illuminate us on the Harbinger/ Phil Falcone deal?

Harbinger has a $ 14.82 NAV (slide 11) while we bought it at $ 9.

Spectrum Brand was created through debt.

 

- Does political atmosphere favors exports of LNG?

We hope.

 

- Would you consider share repurchases?

The Board authorized a $ 25 M share buyback. We will deploy capital depending on opportunities. We are all long term shareholders.

 

- As Ian and Joe mentioned in the past, is Leucadia built for an inflation environment?

We have an hedge against inflation.

With current rates, fixed income is tuff.

There will be a period in time when we will get our cash back.

 

- Leucadia’s Book Value has been flat for 4 years?

Richard Handler says that he is sorry for that but that they are trying their best through blood sweat and tears. Richard & Brian are also shareholders.

 

Although my truncated notes only give a superficial idea of the meeting. I feel that Richard & Brian make a talented duo mentored by Joe Steinberg. They seem frustrated with the current stock price but are patient value investors who will deploy cash at the right time and place. I might be wrong but Leucadia's best days lie ahead. 

 

[greenwave]

I attended the Leucadia annual meeting a couple weeks ago. I didn't take many notes because I believed that the Brooklyn Investor (Blog) would post his. Pardon the poor quality of my recollections and comments. They should not be relied upon.

 

This year’s meeting took place at the Axa auditorium midtown Manhattan. Joe Steinberg, Richard Handler and Brian Friedman were on stage while the other Board members were sitting on the front row. Leucadia's primarily male Board of Directors finally includes one female and one Afro-American. Diversity in corporate America is in progress.

 

Meeting slides

 

http://www.sec.gov/Archives/edgar/data/96223/000119312514195955/d728050dex99.htm

 

History

 

Joe Steinberg reminded us that the company was founded in 1854 in Connecticut as a factory selling to the U.S. Army. In 1979 Talcott National manufacturing business was sold when Ian and Joe took control. More on the topic:

http://www.fundinguniverse.com/company-histories/leucadia-national-corporation-history/

 

Leucadia is now a holding company with an entrepreneur spirit.

 

Richard Handler’s comments

 

- We like strategic partners, we have dry power. Every 3-5 years we face extreme dislocations on the market. We like to keep cash for opportunities.

- We see opportunities on Oil & Gas projects. We now own 20.1% Harbinger with Joint Ventures such as Exco ressources.

- JEF increased its ownership in Homefed to 65 %. There is a lot of value in real estate assets.

- Berkadia now has 700 employees in India.

- Garcadia: US sales of vehicles are as high as 2006.

-  Eventually interest rates will go up.

- We are success fee oriented.

 

Brian Friedman's comments

 

- We have a long term orientation not like private equity firms.

 

Q&A

 

- Can you illuminate us on the Harbinger/ Phil Falcone deal?

Harbinger has a $ 14.82 NAV (slide 11) while we bought it at $ 9.

Spectrum Brand was created through debt.

 

- Does political atmosphere favors exports of LNG?

We hope.

 

- Would you consider share repurchases?

The Board authorized a $ 25 M share buyback. We will deploy capital depending on opportunities. We are all long term shareholders.

 

- As Ian and Joe mentioned in the past, is Leucadia built for an inflation environment?

We have an hedge against inflation.

With current rates, fixed income is tuff.

There will be a period in time when we will get our cash back.

 

- Leucadia’s Book Value has been flat for 4 years?

Richard Handler says that he is sorry for that but that they are trying their best through blood sweat and tears. Richard & Brian are also shareholders.

 

Although my truncated notes only give a superficial idea of the meeting. I feel that Richard & Brian make a talented duo mentored by Joe Steinberg. They seem frustrated with the current price of the stock but are patient value investor who will deploy cash at the right time and place. I might be wrong but Leucadia's best days lie ahead.

-----------

Thank you VersaillesinNY  for posting your meeting notes.

 

I share your view that significantly better days are ahead  for Leucadia over the longer term.

 

greenwave

[Grenville]

VersaillesinNY,

 

Thank you for posting your notes!

[Guest ajc]

VersaillesinNY,

 

Thank you for posting your notes!

 

+1

 

 

[jay21]

Are we sure this down cycle of investment bank purely cyclical or somehow structural?

 

Pretty much everything LUK owns is pretty cyclical. I can't think of one business that isn't. Cyclical businesses are up and down. It's no Berkshire. National Beef is down. Jefferies is down too (most investment banks are down, returning hardly 10% on equity). It would be best to read up on how to value cyclical businesses because that is what we have here ...plus a few new projects. Now what I want to understand is compensation in cyclical companies. It seems LUK is paying as if it assumes an average over the cycle because one can't justify such high compensation during the low parts and I think this is evidenced by the large block of 'no' votes for a compensation-related vote at the latest AGM.

 

This is close to how I see LUK.  A lot of these businesses can earn significantly more than what they currently are.

 

There are quite a few reasons why I got comfortable with LUK after the merger:

 

1. JEF bought back stock and debt during the rating agency situation

2. Knight Capital

3. Harbinger

4. All 3 above were lead by JEF people

5. JEF was instrumental in fortescue

6. Berkadia and Garcadia - they don't move the needle but were incredibly smart and are doing well. 

7. >$2b to deploy

 

Could be either?

 

There was a story in the news surrounding a leveraged loan deal that the big banks couldn't participate in because of regulations.  These regulations did not apply to Jefferies and they ended up with the deal.  I expect them to have higher returns than other IBs because of things like this. I also think JEF's management is pretty good.  Combine good management and a competitive advantage and they should do better than the industry. In terms of the industry, I expect that companies will exit IB businesses if they can't earn decent RoEs, products will reprice, etc which will leave a sensible RoE for the industry.

 

That's why I am comfortable.  I understand if people have concerns and aren't comfortable.

[no_free_lunch]

In terms of the industry, I expect that companies will exit IB businesses if they can't earn decent RoEs, products will reprice, etc which will leave a sensible RoE for the industry.

 

I agree with this.  M&A activity is down (although picking up in 2014), companies are paying down debt and raising cash levels, it just isn't a great time for IB.  I'm voting with my money that this will change.

 

Some of these are a year old but they seem to prove your point that companies will be exiting.

 

THEY had no chance even to clear their desks. Scores of London traders who had gone into work for UBS, a Swiss universal bank, on Monday this week were abruptly barred entry to their offices on Tuesday. Others will soon follow them out of the door: the bank this week announced it would be cutting 10,000 jobs in its investment bank by 2015. The bank will concentrate on its core strengths: wealth management, Swiss retail customers, and still-appealing bits of investment banking like foreign exchange and equities trading. Other investment-banking activities—in its fixed-income businesses, in particular—will be housed in a non-core unit and gradually wound down.

 

http://www.economist.com/news/finance-and-economics/21565648-ubs-swings-axe-game-over

 

“You choose the businesses where you can get the most efficient return on your capital,” Gorman said, referring to Morgan Stanley taking full ownership last year of its then-joint venture with Citigroup, Smith Barney, one of the largest retail brokerages.

“[it’s a]phenomenal business, low capital usage, great returns,” Gorman said.

That rebalancing of the firm can be see in its first quarter results: $4.3 billion of its $8.9 billion in revenues came from wealth and asset management, while the rest came from all of investment banking, including sales and trading, underwriting, and advisory work. In 2006, at the height of the Wall Street trading bubble that almost brought down Morgan Stanley, only 18% of its revenue came from wealth management.

 

http://www.buzzfeed.com/matthewzeitlin/morgan-stanley-ceo-independent-true-investment-banks-are-dea

 

In the wake of a disastrous performance in fixed income & commodities (FICC) trading, Barclays has announced severe cuts to its investment bank. 7,000 jobs are to go over the next two years, and much of the troubled FICC division is to be thrown into a new internal “bad bank” for eventual sale or winding up. Investment banking is to be reduced to no more than 30% of the Group’s asset base, and rather than trading, its focus is to be on client advisory services, wealth and asset management. The Diamond days, when investment banking was Barclays’ largest and most profitable activity and its ambition was to be among the premier global investment banks, seem to be well and truly over.

 

http://www.forbes.com/sites/francescoppola/2014/05/09/is-investment-banking-dead/

[scorpioncapital]

No wonder investment banking is like meat packing these days! We are waiting for others to exit to boost future returns and we pick up the pieces and compensation teams. I don't think Goldman is exiting so we still have formidable competition. We are in an environment where long term isn't paying off, it can't last forever. As long as it lasts, I think talk of a bubble is overrated.

[Grenville]

Additional detail on the Golden Queen JV:

http://www.goldenqueen.com/s/Proposed_Joint_Venture.asp

[wbr]

Im not too familiar with Leucadia, but it certainly looks interesting considering the management's reputation.

 

Is bookvalue per share a reasonable proxy for intrinsic value? If so, why has it not grown over the last 4 years? Is there a problem with the business (I understand that Jeffries is cyclical and takes time to play out, but it's not whole business...) or is management just being conservative and understating bookvalue?

 

Thank you in advance.

[txlaw]

Additional detail on the Golden Queen JV:

http://www.goldenqueen.com/s/Proposed_Joint_Venture.asp

 

Very interesting all-in sustaining cash cost profile.

[txlaw]

Jefferies results:

http://www.sec.gov/Archives/edgar/data/96223/000115752314002577/a50887846_ex99.htm

[txlaw]

Btw, with support of natural gas export growing in Congress, and continued M&A/re-orgs in the O&G sector, I expect Jefferies' energy focused biz to continue to fire on all cylinders (thanks to Ralph Eads). 

 

And hopefully there will be a halo effect around its other commodities-oriented practices.  Iron ore, gold, and other commodities sectors that LUK/JEF has expertise in are ripe for M&A.

 

It's nice to own the broker, ain't it?

[OracleofCarolina]

One of the most-senior executives of SAC Capital Advisors LP plans to start a new hedge-fund firm, potentially with a big chunk of funding from Leucadia National Corp., according to people familiar with deal discussions

[scorpioncapital]

You know it's kind of funny as I recall Ian Cumming & Joe Steinberg maybe 3-4 years ago after they had allocated funds to various "co-investment" vehicles - betting on other jockies, including Bill Ackman (in which LUK lost almost all their money) and David Winters' funds , that after that, selling it all at the AGM saying something along the lines of, we've learned our lessons. We're not going to diversify the capital allocation decisions anymore. Fast forward and it feels like deja-vu all over again with Top Water, and a slew of joint ventures in investment management firms. Perhaps this is part of the fundamental change that Jefferies brought to the new firm.