JEF - Jefferies Group

[constructive]

+1

 

See this article, written in 1998 http://www.aaii.com/journal/article/valuing-growth-stocks-revisiting-the-nifty-fifty

 

Nice, thanks.

 

Yes, thanks for posting!  In fact this article deserves a thread to itself under Strategies! 

 

"In 1975 there was no way of knowing which explanation was correct. But 25 years later we can determine whether the Nifty Fifty stocks were overvalued in 1972. Examination of their subsequent returns shows that the second explanation, roundly rejected by Wall Street for years, is much closer to the truth. A portfolio of Nifty Fifty stocks purchased at the peak would have nearly matched the S&P 500 over the next 26 years. ... "

 

Remember that the subsequent returns ended during the late 90s bubble, which Siegel didn't notice. The Nifty Fifty have been underwater compared to the market for the large majority of years since 1970. Siegel just happened to pick a high mark.

 

By my math the Nifty Fifty basket has returned 4.9% annualized since that article was published, is currently over 25x earnings, and has limited growth prospects.

[WhoIsWarren]

Remember that the subsequent returns ended during the late 90s bubble, which Siegel didn't notice. The Nifty Fifty have been underwater compared to the market for the large majority of years since 1970. Siegel just happened to pick a high mark.

 

By my math the Nifty Fifty basket has returned 4.9% annualized since that article was published, is currently over 25x earnings, and has limited growth prospects.

 

constructive, thanks for doing the work updating performance since 1998 - I had only eye-balled the companies and figured they've done reasonably ok.

 

I've gone back and checked the numbers too.  Firstly - big qualifier - only 27 of the original 50 are  still quoted.  Some good and bad companies gone, including Gillette, Lubrizol, Anheuser-Busch, 5 pharma companies, as well as Eastman Kodak and Digital Equipment Corp.  If you can get beyond that, I calculate the TOTAL RETURN (i.e. including dividends) since Aug 1998 of the remaining 27 to be 7%, versus the total return of the S&P of 6%.  For argument's sake, let's say both groups have performed broadly in-line.

 

As for current valuation, perhaps you're right that this is a bunch of low-growth stocks.  But again, I calculate the valuation for both groups as similar, with the 12 month rolling historic median P/E at 20x for the Niftys and 18.5x for the S&P.  A rounding error.

 

Let's not try to split hairs as I think my original thesis about the Nifty Fitfty still holds.  This is clearly not proof of what I originally put forward -- that the market under-appreciates high quality companies (of which I believe Lancashire is one) -- but it certainly warrants debate.

[gfp]

FXCM conference call and slides are out -

 

http://ir.fxcm.com/

[petec]

I've decided my favourite ever deal would be if these guys bought Lancashire ;)

 

That would be nice, but Lancashire pays very little tax on its earnings. That wouldn't help Leucadia use up its NOLs.

 

Both companies have become situated as "go to" guys when something bad happens in their market niches, and a quick rescue is impossible from companies with entrenched bureaucracies that have to perform due dilligence. Lancashire has their own history of pulling the bacon out of the fire for key clients on short notice, just as Leucadia can rescue a desperate financial company from bankruptcy before the run on the bank starts.

 

Leucadia will have used up its NOLs in 3-5 years anyway, so I don't think the deciding factor for Leucadia management in doing a deal would be if the business pays taxes or not.

 

For me I wouldn't like to see such a deal happening.  I own both Lancashire and Leucadia and think I'll do best if they stay separate. 

 

In fact, I don't want to see anyone buy Lancashire, as I think its worth is far higher than what anyone out there would be willing to pay.  It's a quality company and I think the market systematically undervalues such entities (and overvalues crappy ones).  I think this explains why investors didn't necessarily overpay for the quality companies that made up the "Nifty Fifty", even though they looked very expensive on static valuation metrics (averaging c.42x P/E in 1972, more than twice the then P/E of the S&P500).  Yes, their stock prices subsequently fell, but over the subsequent years their fundamentals shone through so that a basket of Nifty Fifty stocks bought at the peak would have performed as least as well as the market to date (I suspect performance has been much better). See this article, written in 1998 http://www.aaii.com/journal/article/valuing-growth-stocks-revisiting-the-nifty-fifty

 

As for Leucadia, as opportunistic value investors they will seek to capitalise on market dislocations or misfortunes begetting individual situations.  I severely hope Lancashire doesn't fall into either of these categories (!!) and that both companies can continue to grow their intrinsic values over time.

 

It was a slightly facetious comment on my part but rather than NOL usage, my point was more that LRE's float might add somewhat to the LUK permanent capital base.  What I don't know is how freely LUK could invest LRE's float without incurring the wrath of ratings agencies and/or worrying clients. 

 

Agree re the long run undervaluation of quality.  Fundsmith has good articles on this and points out that you could have paid 240x earnings for Coke in 1980 and you'd have matched the performance of the SP500 to 2011 (when the article was written).

 

https://www.fundsmith.co.uk/Libraries/Research/to_pay_or_not_to_pay.sflb.ashx

https://www.fundsmith.co.uk/Libraries/Research/return_free_risk_web.sflb.ashx

 

[scorpioncapital]

I think the odds that LRE is on LUK's radar is somewhere close to zero.

 

 

 

[petec]

I think the odds that LRE is on LUK's radar is somewhere close to zero.

 

I agree entirely. 

[rogermunibond]

Akridge's Union Station development gets a nice NYT write up

 

http://www.nytimes.com/2015/04/15/realestate/commercial/union-station-in-washington-has-a-grand-development-plan.html

[BargainValueHunter]

http://www.wsj.com/articles/for-leucadia-national-a-big-bet-pays-off-1431126200

 

A big bet, made quickly amid crisis, is proving a big winner.

 

Leucadia National Corp., parent company of investment bank Jefferies, has so far tripled the money it invested in an 11th-hour rescue of troubled retail currency brokerage FXCM Inc. earlier this year, the company reported on Friday.

 

Leucadia had provided FXCM with a $300 million loan in January, after the currency broker scrambled to cover huge losses

 

[greenwave]

Akridge's Union Station development gets a nice NYT write up

 

http://www.nytimes.com/2015/04/15/realestate/commercial/union-station-in-washington-has-a-grand-development-plan.html

 

-------

LUK    AIR RIGHTS      UNION STATION , WASHINGTON

 

Does anyone know the status of  Leucadia’s interest in the Washington Union Square redevelopment plan as referenced below,..(  it seems  that it was last mentioned about 3 years ago )?

 

I could not find a mention of any ownership in the 2014 annual LUK report.  Was their interest transferred last year as part of the Home-Fed stock deal?

 

 

greenwave

 

*****************************************************************************

FROM THE 2011 ANNUAL REPORT ………

 

 

From the 2011 10-K describing the carrying value of the air rights:

 

a 15 acre, unentitled air rights parcel above the train tracks behind Union Station in Washington, D.C. ($11,543,000).

 

This is the only reference I can find in the latest 10-K. The first reference I found to the air rights was in the 2006 10-K when the carrying value was $10,100,000. It was also mentioned briefly in the 2006 annual letter as an investment that's "one for the grandkids".

 

Comment in 2007 annual letter:

 

15 acres of unentitled air rights above the railway track behind Union Station and next to the Capitol in Washington, D.C. We are planning to submit a planned unit development application for zoning permission of up to 3 million square feet of mixed use development.

 

Comment in 2010 annual letter:

 

The Company owns 15 acres of unentitled air rights above the train tracks behind Union Station in Washington, D.C. with a carrying value of $11.4 million. It will be a long time before development starts, but preliminary re-zoning approval has been received, and we hope for final approval this year or next.

 

Comment in the 2011 annual letter:

 

We own 15 acres of air rights above the train tracks behind Union Station in Washington, D.C. In April 2011, the rezoning of our property received final approval. The rezoning granted us the height allowances that we desired – in a city that restricts height, every foot counts. We continue to work with Amtrak and our other neighbors on

project design and the construction and financing of the platform on which our project will be built.

 

And I found the following quote in a Washington Post article dated 7/24/12 (http://www.washingtonpost.com/local/amtrak-to-propose-7-bill...

 

District-based developer Akridge also plans a $1.5 billion complex of offices, residential towers and a hotel. The development, to be constructed on a deck built over the tracks behind Union Station, would link Capitol Hill to the NoMa neighborhood.

 

Dubbed Burnham Place after Union Station architect Daniel Burnham, the 3-million-square-foot project would include a rebuilt H Street bridge and an expanded street grid that would welcome pedestrians to a large new northern entrance to the station. Pedestrian access would be added on all sides of Union Station.

 

Akridge paid $10 million in 2006 for the right to build above the tracks. “We are now finally getting to see the potential for what Union Station should be,” said Matthew J. Klein, Akridge president.

 

---------

 

[undervalued]

I noticed a JEF dividend payout on 5/8/2015. Does anyone know what this is? I don't see any news about special dividend being paid out by JEF.

[WhoIsWarren]

I noticed a JEF dividend payout on 5/8/2015. Does anyone know what this is? I don't see any news about special dividend being paid out by JEF.

 

Where are you seeing that?  I've checked filings and news on Jefferies in Bloomberg....

JEF is wholly-owned subsidiary of LUK, so who exactly would a dividend be paid to?  ???

[undervalued]

I noticed a JEF dividend payout on 5/8/2015. Does anyone know what this is? I don't see any news about special dividend being paid out by JEF.

 

Where are you seeing that?  I've checked filings and news on Jefferies in Bloomberg....

JEF is wholly-owned subsidiary of LUK, so who exactly would a dividend is being paid to?  ???

 

That is what I don't get. I am seeing them in my brokerage accounts (two different accounts and two different brokerage companies). Did anyone else receive them? I hold both JEF and LUK before the merger. I think this is a one time payment. It's weird because the payment is coming from JEF instead of LUK.

[gfp]

I would imagine you are finally receiving the settlement proceeds that LUK made with previous shareholders of JEF.  It was 70 million dollars or something like that.

 

 

edit - yep, it looks like there was a May 5th pay date -

 

https://donlinrecano.com/Clients/lnc/Index

[matjone]

so what did it come out to per share of LUK?

[gfp]

so what did it come out to per share of LUK?

 

it would be per share of JEF held before the merger I believe

[matjone]

yeah sorry, what I mean is how much would you get if you bought JEF before the merger and are still holding LUK.  I ask because I did that and then transferred the account and am wondering if it is worth messing with if it doesn't show up.  Thanks

[Phaceliacapital]

I went through the investment case the past couple of days.

 

For those following the company, what are your thoughts on Jefferies? It's such a large part of LUK's valuation..

 

It seems like a well managed bank, with less regulation from a SIFI and commercial bank license perspective. Both leverage and level 3 asset exposure looks ok. What value do you guys place on this business? They have an average 10.2% ROE for the past years so I would ballpark it at 1x book? Anyone using P/E and if yes, on what kind of earnings? They did around 350 mn last year.

 

I like their most recent deals. Even the FXCM deal adds around 6.5% to book if you revalue it to those 947 mn numbers..

 

Also, ballpark estimates for LAM? I have it at book but obviously LUK thinks they can build it into a profit driver that is significantly worth more than book..

 

Thanks for your input!

[petec]

I went through the investment case the past couple of days.

 

For those following the company, what are your thoughts on Jefferies? It's such a large part of LUK's valuation..

 

It seems like a well managed bank, with less regulation from a SIFI and commercial bank license perspective. Both leverage and level 3 asset exposure looks ok. What value do you guys place on this business? They have an average 10.2% ROE for the past years so I would ballpark it at 1x book? Anyone using P/E and if yes, on what kind of earnings? They did around 350 mn last year.

 

I like their most recent deals. Even the FXCM deal adds around 6.5% to book if you revalue it to those 947 mn numbers..

 

Also, ballpark estimates for LAM? I have it at book but obviously LUK thinks they can build it into a profit driver that is significantly worth more than book..

 

Thanks for your input!

 

After a fairly comprehensive look-through I ended up valuing the whole thing on 1x bv for simplicity.  For me the upside is in a) the combination of clever management, permanent capital, and the deal flow that JEF produces, and b) the possibility of LAM becoming something.  I won't pay for the latter but I'm excited to hold the former at anything around book value.

 

P

[benhacker]

it would be per share of JEF held before the merger I believe

 

It was $0.50 / JEF share, mine hit at IB either yesterday or day before.

 

Phaceliacapital, I think the LAM business is pretty interesting, but valuing it above book requires some assumptions that could vary widely.  I was a shareholder of JEF pre-LUK, and I was quite bullish on their long term prospects... that has not been realized recently, but my thinking is still intact.  However, I would say that no matter what assumptions folks throw out, the fact will remain that for now, LUK doesn't earn enough to justify a premium (or maybe even a 1x) multiple to book... the only question is what you think this management team doing the things they are doing will do in the future?

 

I think Petec's rationale is a good one... the problem is when LUK gets to say 1.2x book, what do we do?  I think right now it's unambiguously "cheap", but I think for most (at least those I talk to) it's just a trading sardine to be flipped 20-30% higher.

 

Ideally, LUK just starts putting up big income numbers over time and never really gets to a large premium to book... then the question of when to sell isn't really a hard one. ;)

 

For me personally, I think JEF is worth at least (marked up w/ goodwill) book, and overtime, they can grow into a more formidable earnings machine... the gears look a little sticky now though, so hard to look past that.  I think National Beef is in the trough of the cycle, and has good upside, maybe not a great business, but a good one I think.  I like the commercial mortgage stuff a lot.  I think the business I'm probably most excited about is LAM, mostly because I view it as pretty asymmetric.  It could be game changing or maybe 6-8% ROE... but I highly doubt it would be a loser.  I also like HRG a lot.

 

But mostly, I like Handler, and the entire team LUK has... and I think this is an area of wide disagreement!

 

Anyway, I think it's pretty interesting here.  I don't see a lot of companies run by folks who have a great track record, with a big ownership stake, trading for under book, and not managing hugely larger sums than when they built their track record.  Compensation could be lower sure, and businesses under their umbrella haven't been blowing the doors off, but I think that's just the cycle of things from time to time.  Perhaps it's my bias and ownership from lower prices that is blinding me to something here, but I'm pretty sure not (I hope!).

 

Ben - LUK is my largest position (I've mostly stubbed out FXCM), and I also own HRG.

 

PS - I do think there is a general deflation thesis risk to owning LUK, so if you think low rates & low inflation are here to stay, you probably don't have high expectations for this name.

 

[petec]

 

The problem is when LUK gets to say 1.2x book, what do we do?

 

Agreed - I think I'll hold at 1.2x bv just because it takes me a lot of work to find a management team I like an I don't want to weed the flowers.  But much higher and I'd question it unless there is a good reason (a great acquisition, etc.).

[scorpioncapital]

I have a different theory. Most controlled conglomerates/financial firms trade at a discount to book value. By controlled, I mean 50%+ ownership. Yet Leucadia has no major shareholder and management owns maybe 10-15% tops. However, there is a note in the financials that due to the utilization of large loss carryforwards, there are restrictions on new share acquisitions beyond I think it's 5%. The DTA will take perhaps 5-10 years to be used up. So maybe the market is implying that this is similar to a control discount. It's not that bad for LUK yet (it trades near 1x tangible BV). But it could be a headwind, especially if management isn't doing very well for LUK's growth in BVPS. If you look at the last 3-5 years, LUK BV has not actually increased that much. I would have never thought JEF would have 2 quarters of near zero earnings. That's pretty volatile. If we assume a 10% return on tangible equity, it should do somewhere close to $350 million/yr minimum.

[Phaceliacapital]

I also have ballpark 350 mn for JEF, at 10x that's only 3.5bn.. Which is almost its tangible book value if you let its 2 bn of intangibles out (and thus ascribe no value to its franchise value).

 

Important to keep in mind is that it's only the first time in operating history that JEF has posted around 350 mn in earnings.. I saw an analysis somewhere that pointed to 1.2 bn in earnings in 2017/2018. Seems like a stretch but would mean a homerun for LUK as an investment.

 

[jay21]

I also have ballpark 350 mn for JEF, at 10x that's only 3.5bn.. Which is almost its tangible book value if you let its 2 bn of intangibles out (and thus ascribe no value to its franchise value).

 

Important to keep in mind is that it's only the first time in operating history that JEF has posted around 350 mn in earnings.. I saw an analysis somewhere that pointed to 1.2 bn in earnings in 2017/2018. Seems like a stretch but would mean a homerun for LUK as an investment.

 

IMO, a lot of the businesses LUK owns have very asymmetric payoffs. If you pay "FV" based on current earnings I think you are getting a few free options.

[benhacker]

PC, I think JEF has some serious built in growth due to the nature of how they have ramped up and spent on initial expenses for MD's.  I'm not sure where you saw the '17+ numbers you quoted, I think that is higher than I would expect, but I do expect a large amount of growth for them.

 

jay21, agree.

[WhoIsWarren]

The DTA will take perhaps 5-10 years to be used up.

 

It probably doesn't change the gist of your argument, but management expects the DTAs to be used up in 3-5 years....