Leucadia National Corp. (NYSE:JEF) can be a challenging company to understand and value. After all, there's Jefferies, the investment bank that's at the core of the company; a group of partly- and wholly-owned operating companies led by National Beef; and also Leucadia's $700 million-plus stock portfolio, primarily made up of a 23% interest in HRG Group Inc. In other words, Leucadia is made of a lot of moving parts across unrelated industries.
And while it may be a little harder to follow the company's various businesses, CEO Rich Handler and team are convinced that owning a variety of strong cash-producing businesses can make for market-beating returns. The trick? Utilizing the strengths of Jefferies to find great investment banking opportunities to put the cash flows produced by the operating businesses to work at Jefferies, or by acquiring more cash-cow businesses.
Unfortunately, more than one of those parts has struggled over the past year or so, and that's been a bad recipe for investors, with shares down about 20% over the past year. However, it's looking like Leucadia may have started turning the page, reporting what Handler called "more normal" results at Jefferies, strong earnings from National Beef after an ugly 2015, and steady growth in many of its other businesses. Let's take a closer look at Leucadia's second quarter results.
Return to profits, growth across businesses
In the second quarter, Leucadia reported net income attributable to Leucadia shareholders of $57.3 million, good for $0.15 per share. This was less than the $0.25 per share the market was expecting, as fellow Fool Dan Caplinger covered in the earnings preview, but the company's earnings before income tax was $139.5 million, and the company said its income tax expense is "substantially non-cash" because of its federal NOLs, or net operating losses within its subsidiary businesses.
Here are some highlights on the results across Leucadia's businesses and investments:
- Improved equities and fixed income results at Jefferies, though capital markets activity continues to remain poor.
- $279 million investment in FXCM has generated a strong return: a cumulative $160.9 million in cash so far, with $192.5 million still remaining on principal loan balance.
- Berkadia joint venture generated $20.4 million in income and paid $35.3 million in cash to Leucadia in the quarter.
- National Beef generated $62.9 million in pre-tax income.
These are just a few select operating results from some of Leucadia National's operating businesses. There are many more, including a car dealership joint venture, an Italian wireless broadband provider, timber, gold mining, plastics manufacturing, and energy assets owned either wholly or in part by the company. And the bottom line last quarter was that some of the most important ones, such as Jefferies and National Beef, not only performed well but didn't weigh the company down like they have in recent quarters.
Looking ahead for Leucadia
One of the realities of investing in Leucadia is that its business results, especially at Jefferies, will be "lumpy" because of the unpredictable nature of Jefferies' investment banking results from quarter to quarter. But at the same time, that investment banking business can be incredibly profitable and provide management with the kind of capital that it can use to buy great businesses to add to the Leucadia family.
Over time, these investments should pay off and help reduce the ups and downs tied to Jefferies. This quarter we got a glimpse of this, with National Beef rebounding from a rough year-plus with beef prices and inventories, and Berkadia, Garcadia, Conwed, Linkem, and several other operating businesses and joint ventures delivering strong cash flows and growth. But at the same time, it's going to take years for those businesses to get big enough to smooth out the lumps at Jefferies.
But if there's anything investors should take away from this past quarter's results, it's that things are stabilizing at Jefferies and National Beef after a tough 2015. That should give Handler and team even more cash flows to invest in a bigger, better Leucadia National.