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Leucadia Recovers Despite Market Turbulence

By Dan Caplinger – Nov 6, 2016 at 2:45PM

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Record results for the National Beef unit helped improve the conglomerate's prospects.

Conglomerates can be tricky to assess, and Leucadia National's (JEF -1.54%) combination of holdings includes well-known financial company Jefferies Group, food company National Beef, and a host of other companies in a variety of industries. Coming into Wednesday's third-quarter financial report, Leucadia investors had high hopes that the company would be able to get through what has been a tricky time in the investing world and reverse poor performance from the year-ago quarter. Leucadia succeeded in doing that, but shareholders still fear tougher times ahead. Let's look more closely at how Leucadia National fared and what might be coming down the road for the conglomerate.

Leucadia has a majority stake in National Beef. Image source: National Beef.

Leucadia turns the tide

Leucadia's third-quarter results looked quite strong. Revenue rose 13% to $2.68 billion, and that was far better than the consensus forecast for sales growth of closer to 8%. The company also managed to reverse a year-ago net loss, posting net income of $154.4 million. That worked out to earnings of $0.41 per share, which was a nice turnaround despite missing the $0.43 per share figure that most investors had expected from Leucadia.

Taking a closer look at Leucadia's numbers, it was interesting to see where the biggest influences were on the company's overall results. On one hand, when you look at revenue, Jefferies played a much more important role than National Beef. The financial company's revenue rose by 13%, matching the overall company's gains. By contrast, the National Beef unit actually saw sales decline substantially, falling more than 6% from year-ago levels. The provision for all other revenue also performed quite well, accounting for the remainder of the year-over-year gains.

Looking at pre-tax income, however, gives a much more balanced picture of Leucadia's success. There, much lower costs at National Beef showed the turnaround there, with the company posting a pre-tax profit of $108.3 million compared to a year-ago loss of $31.7 million. Jefferies saw pre-tax income of $83.2 million, compared to just $3.3 million in the third quarter of 2015. The all-other segment reversed an even larger loss, instead posting an $89.8 million pre-tax profit. Better performance from the FXCM unit explains most of the gains from the other segment.

CEO Rich Handler and company president Brian Friedman expressed their positive views on Leucadia. "We are pleased with our overall momentum," the two executives said, "including better results at Jefferies and a record quarter for National Beef." The two leaders also noted that a more normal operating environment for the cattle industry and a stronger team of professionals at Jefferies helped contribute to the company's overall positive performance.

What's ahead for Leucadia?

Leucadia is also positive about the future prospects for most of its current investments. Even though the energy sector has struggled, producing an impairment charge in its investment in Juneau Energy, Leucadia thinks that recent developments in the oil and gas market bode well for its energy exposure. The completion of the restructuring at FXCM should allow Leucadia to participate more effectively in providing incentives for FXCM's management team to turn that business around.

Of course, there are still plenty of uncertainties for Leucadia. With markets having hit turbulence in October, it's entirely possible that Jefferies and FXCM will start seeing financial headwinds hurt their respective performance going forward. Moreover, Leucadia once again reiterated that the implementation of the U.K. Brexit decision could adversely hurt Jefferies' business, especially in Europe.

Leucadia investors didn't have a major reaction to the news, and the stock fell about 1% on the day following the announcement, which was roughly in line with the overall stock market's performance. The company has made solid progress, but Leucadia will remain vulnerable to changing conditions in the financial markets for the foreseeable future.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Leucadia National. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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