JEF - Jefferies Group

[Txvestor]

Definitely a good sales price. Looks like it was at around 10.5-12x EBITDA, which added together with their DTAs make it a decent price for cash out. Agree that HRG getting cleaned up. Hopefully the FGL sale gets sorted out.

 

There is some more details on the sale here.

 

http://inpublic.globenewswire.com/releaseDetails.faces?rId=2065261

[no_free_lunch]

Are you referring to LUK in general or Conwed valuation?

 

hahah... Conwed valuation.  In my sum-of-parts, I explicitly gave Conwed a much lower valuation.

 

I think LUK is probably worth high $30's.  My largest position.

 

That is good to hear.  I am probably out at $30.  I don't really like how linked it is to commodities.

[arcticfox]

Building some momentum here, now some of the hidden value is coming to light. A very solid price for a good business. With interest rates higher, and maybe finally some book value growth on the horizon, with the conwed sale, improved earnings at jefferies, beef, and energy. Plenty of value to unlock, will continue to take time, but I continue to like it.

[benhacker]

NFL,

 

I don't really like how linked it is to commodities.

 

By the way, I think this is kind of like a myth.  I don't really see why LUK is tied to commodities, unless you view JEF's energy banking business as  a dominant portion of the value.

 

Vitesse / Juneau & Golden Queen are de minimis portions of book / value, and LUK has long since let go of their FMG.aus note and various direct ownership in mines.

 

Do you consider the Beef business to be "commodities" or do you view JEF has being commodities... or if not, why do you see it as linked to commodities?

 

TIA

[no_free_lunch]

Ben, if you think it is a myth then it probably is.  Just based on my cursory analysis.  The beef investment, they had some mining investments and I just read that JEF was heavily tied to the commodity market.

[rogermunibond]

I think Jefferies sold their commodity trading unit. 

[scorpioncapital]

A commodity has many definitions. It isn't just gold, silver, wood, etc.. like in the old days. A manufacturing business can be a commodity business. Even a software business can be a commodity business. Anything that does not distinguish itself in any particular way and price is the main input and output in the buying decision. With respect LUK, I like to consider it a secondary stock as a gauge of the overall market. When secondary stocks start perking up as it seems is happening with LUK, you can use that as an indicator that markets are getting frothy because these laggards are characterized by their mediocre assets and management. When they wake up, we might be heading toward the beginning of the end :)

[Foreign Tuffett]

NFL,

 

I don't really like how linked it is to commodities.

 

By the way, I think this is kind of like a myth.  I don't really see why LUK is tied to commodities, unless you view JEF's energy banking business as  a dominant portion of the value.

 

Vitesse / Juneau & Golden Queen are de minimis portions of book / value, and LUK has long since let go of their FMG.aus note and various direct ownership in mines.

 

Do you consider the Beef business to be "commodities" or do you view JEF has being commodities... or if not, why do you see it as linked to commodities?

 

TIA

 

I think there's some truth to the idea that LUK has significant exposure to commodities. If you add up the 6/30/16 book values of Idaho Timber, Golden Queen, Juneau, Vitesse, and National Beef the total is ~$1.3B -- significant relative to the company's total "Parent Capital."

 

I include National Beef here, as it's fate is inextricably linked to the beef price. The size of the beef herd (its primary input) responds to beef prices, albeit it with significant lag time.

 

I know Jefferies has a reputation as being very involved in the energy IB space, but I don't follow LUK closely enough to know how much truth there is to that.

[benhacker]

...the total is ~$1.3B -- significant relative to the company's total "Parent Capital."

 

11% is "significant"?

 

NFL, thanks for your honesty.  I think the market tends to bucket LUK's businesses (which in aggregate do not show a clear financial picture via GAAP) as the industry of choice based on LUK's valuation.  When LUK price is doing well, people talk about LUK's "good" businesses, which the price is low, people talk about LUK's bad businesses.

 

Cyclicals, startups and other odds and ends get thrown into the "commodities" bucket.  I don't think Nat Beef is a commodity biz, but I do think it gets treated that way from time to time.  I think the market just doesn't value LUK properly given the history, and noise in the name.

[Foreign Tuffett]

Update on Folger Hill:

 

http://www.reuters.com/article/us-hedgefunds-folgerhill-idUSKBN1442T5

[Foreign Tuffett]

...the total is ~$1.3B -- significant relative to the company's total "Parent Capital."

 

11% is "significant"?

 

NFL, thanks for your honesty.  I think the market tends to bucket LUK's businesses (which in aggregate do not show a clear financial picture via GAAP) as the industry of choice based on LUK's valuation.  When LUK price is doing well, people talk about LUK's "good" businesses, which the price is low, people talk about LUK's bad businesses.

 

Cyclicals, startups and other odds and ends get thrown into the "commodities" bucket.  I don't think Nat Beef is a commodity biz, but I do think it gets treated that way from time to time.  I think the market just doesn't value LUK properly given the history, and noise in the name.

 

Once you subtract out the $1.8B in non-operating "corporate liquidity" and take Jefferies' commodities (particularly energy) IB'ing exposure into account it starts to look more significant.

 

Ultimately though, I agree with you that commodity prices are not the determining factor in LUK's future success. Jefferies is ~50% of the company, so how it performs is crucial to the thesis.

 

 

[benhacker]

All fair points FT.

 

Thanks for the Folger Hill link...

[MrB]

2017 seems to be starting off better for NB compared to 2016.

https://www.ams.usda.gov/mnreports/lswwcbs.pdf

[Guest roark33]

FXCM is such a cesspool....

 

http://www.financemagnates.com/forex/brokers/breaking-cftc-levies-7m-fine-fxcm-forced-quit-us-market/

[xtreeq]

Here's the FXCM docket

http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfforexcapitalorder020617.pdf

[racemize]

This is from reddit--I haven't verified all the numbers, but it certainly rings true that they've been paid a lot, and we haven't gotten jack in the last 5 years...

 

Leucadia National Corporation (NYSE: LUK) is a case study in excessive management compensation despite poor performance.

LUK's stock price today sits around its 12/31/12 closing price of $23.79. That was just prior to the consummation of the merger between Leucadia and Jefferies Group that put the CEO & President duo of Dick Handler and Brian Friedman at the helm, succeeding Leucadia’s Ian Cumming and Joe Steinberg. In the 4+ years since, shareholders have received essentially zero price appreciation and about a dollar per share in dividends. Meanwhile, Handler and Friedman combined have been paid $24 million in cash. That may not be unreasonable, but here's the stinker: in that same time, they’ve also issued themselves 7 million RSUs (net of some RSUs that they loudly forfeited for subpar performance). Those RSUs are worth $160 million at today’s price of ~$24/share. This year, they’ve awarded themselves another 2 million combined RSUs, worth another ~$50 million at today's price.

LUK’s underperformance is long-term under this management duo. LUK underperformed the S&P Financials by 12% in 2013, 35% in 2014, and 20% in 2015. Finally, in 2016, they beat that group by 13% due to the late-year surge, resulting in a cumulative underperformance in those 4 years of 84%. It’s worth noting that the S&P Financials itself badly underperformed the S&P 500 in these years!

There is no indication that this management team is capable of better performance going forward. Handler’s background is in high yield trading, and all the money has been squeezed out of this long bond bull cycle, while Jefferies Capital Partners, which was Friedman’s work prior to Leucadia, is a bottom quartile private equity firm. The last two Jefferies Capital Partners funds are rumored to be worth less than invested capital.

Ultimately, the main issue isn’t management incompetence, but rather the excessive compensation despite poor returns to shareholders and lack of transparency about that compensation. How can shareholders stand for this?

For instance, the 2016 compensation package was not finalized and approved until 2/19/16, when the stock price was $14.76. So, they awarded themselves RSUs worth a combined $50 million at that price, even though they correctly tied the performance thresholds for the awards to vest at the 12/31/15 price of $17.39. So instead of those RSUs being worth a combined ~$69 million at the current price/share as they probably should have been, they’re worth ~$81 million! Of course, the details of this compensation plan were published in a late Friday afternoon filing. The fact that they got away with this is extraordinary.

There is an argument that the timing restrictions on sales permits this excessive compensation. Personally, I don’t see how those sale restrictions forgive the sheer magnitude of dilution that shareholders are suffering. Putting figures on that dilution, as of 12/31/16, there were 360 million common shares. If all of the RSUs that Handler and Friedman have awarded themselves in just the last 5 years vest, excluding the forfeited RSUs, they’ll own 2.4% of the common stock from these RSUs alone. How many mature $8 billion market cap businesses run by non-founders pay the CEO/President this excessively?

[MrB]

Folger Hill's Kumin - "I am truly sorry that we have not delivered better results thus far to our investors who put their faith in me...."

 

http://uk.businessinsider.com/sol-kumins-folger-hill-year-end-hedge-fund-letter-2017-2?r=US&IR=T

 

[racemize]

Folger Hill's Kumin - "I am truly sorry that we have not delivered better results thus far to our investors who put their faith in me...."

 

http://uk.businessinsider.com/sol-kumins-folger-hill-year-end-hedge-fund-letter-2017-2?r=US&IR=T

 

Seems kind of odd to say that they were investing in "out of favor" companies as opposed to energy and financials as "sectors with greater momentum".  Where was he in February?  The only momentum energy and financials had was straight down...

[scorpioncapital]

Very funny! I believe Ackman wrote such a letter when the Target deal went South (LUK was in on that and lost most of their money).

Of course these managers have nothing to lose when things go south, all upside no downside.

Just the way they write the letter, the words they use, the talk they talk it's almost self evident to a kindergarten kid that they have no discipline of thought, no common sense, and no idea what game they are even playing. Scratch that, they are very aware that the game they are playing is segregate out our fees from the lump of capital the suckers gave us!

 

[Scunny Bunny]

Folger Hill's Kumin - "I am truly sorry that we have not delivered better results thus far to our investors who put their faith in me...."

 

http://uk.businessinsider.com/sol-kumins-folger-hill-year-end-hedge-fund-letter-2017-2?r=US&IR=T

 

Seems kind of odd to say that they were investing in "out of favor" companies as opposed to energy and financials as "sectors with greater momentum".  Where was he in February?  The only momentum energy and financials had was straight down...

 

I couldn't have put it better myself. Where were all these guys when banks were trading at 0.6-0.7x BV?

[OracleofCarolina]

http://leucadia.com/All/1/1112

 

Leucadia's annual letter comes out and all I hear are cricket's. Has the value community given up on the "new" LUK??

[greenwave]

http://leucadia.com/All/1/1112

 

Leucadia's annual letter comes out and all I hear are cricket's. Has the value community given up on the "new" LUK??

-------

Oracle,

 

Could it be that  many investors have moved Leucadia  to the "too hard pile " over the past few years?

 

My take is that after a long and very challenging integration of the old Leucudia culture with the new Jeffries Investment Banking culture, ( along with more than a few serious mis-steps along the way  ) ,... Handler & Team  are just now positioned to take advantage  of their broad based knowledge to become a much more  efficient and  highly profitable company.

 

I am optimistic that they are now reasonably well positioned to take "advantage of their advantages " for the long term investors.

 

greenwave

 

 

[scorpioncapital]

I didn't move it to the 'too hard pile', I moved it to the 'too dumb pile'  ;D

[petec]

http://leucadia.com/All/1/1112

 

Leucadia's annual letter comes out and all I hear are cricket's. Has the value community given up on the "new" LUK??

-------

Oracle,

 

Could it be that  many investors have moved Leucadia  to the "too hard pile " over the past few years?

 

My take is that after a long and very challenging integration of the old Leucudia culture with the new Jeffries Investment Banking culture, ( along with more than a few serious mis-steps along the way  ) ,... Handler & Team  are just now positioned to take advantage  of their broad based knowledge to become a much more  efficient and  highly profitable company.

 

I am optimistic that they are now reasonably well positioned to take "advantage of their advantages " for the long term investors.

 

greenwave

 

I bought at $15 when I thought it was too cheap to ignore and reduced at $19 and $24 as the "obvious" discount dissipated, but the remainder I intend to keep: smart managers positioned to see opportunities with permanent capital should do well over time.  Inevitably there will be mistakes but on the whole they've rationalised the Leucadia portfolio in a very intelligent way.

[thepupil]

 

LUK trades at 73% of tangible capital. JEF's IB is 44% of that. I don't think the two are really comparable. 

 

If we write off National Beef, Vitesse, Juneau, Golden Queen, Linkem, 1/2 of the DTA, 50% of FXCM, and mark JEF at 85% of tangible, you get to the stock price.

 

I think at this point (and I recognize I've said this at higher prices) the issues are priced in and the optionality is very high. Taking the above steps to impair the assets is probably overly harsh, but leaves you at a good starting point in terms of owning the other stuff.

 

- Berkadia, maybe worth 8-16% of the market cap as a good, albeit cyclical, business that is easily monetizable given the other side of the JV is Berkshire. It's not worth $200MM.

 

-Garcadia and being a landlord to garcadia seems like a decent business worth more than its mark

 

- Harbinger pro-forma for the closing of the FG&L sale in Q2 (which has some China risk) will be a no net debt owner of Spectrum Brands so that's 10% of the market cap that's in a relatively easy to understand/ get comfy with business (making George foreman grills and other crap).

 

-Homefed is marked well below its market value and is monetizable

 

Leucadia is my biggest $ PnL loser of all time due to combination of a 30+% drawdown and big sizing (think it was maybe 15% or so at peak). It was a mistake at $24 and a bigger mistake not selling in the low $30's when I thought it was getting a bit ahead of itself but was trying to be all "let the winners run".

 

That being said, I see a ton of levers to pull to convert non-earning assets into more obvious forms of value.

 

Side note: I thing buying HRG and shorting out the FG&L deal risk and SPB MTM may be a nice way to play a Harbinger simplification/restructuring. Steinberg is highly incentivized to close the NAV discount for LUK's sake. Haven't run the exact numbers though, just spitballing.

 

I didn't size it up the common big in early 2016, but was pounding the table on the bonds and to a lesser degree the stock in 2016 and there were a lot of vocal, bulled up posters (benhacker comes to mind). I think when I first bought it in the mid 20's I was a bit more optimistic than I am now. I sold the bonds at par and am considering trimming the common to a quasi-permanent smaller position and wait to see how everything evolves. Could still make a credible case for $35-$40, but it's obviously less exciting and priced for less shitty things happening than at $16. At $16 you could writeoff a ton of their assets completely and still be okay (see above)

 

That was a long and self-centric way of saying I don't think the value investing community has at all given up on LUK. I think most have tempered expectations given the  hit rate and frustrating tendency for negative surprises, but "given up" seems too strong.

 

Late 2015/early 2016 and the "Leucadia is not longer loveable" article in barrons/wsj was the point where "the market" had given up, but many here had not.