In this episode of Industry Focus: Energy, Motley Fool analysts Nick Sciple and Buck Hartzell dive into the conglomerate dynamo Loews (L 1.07%) -- not to be confused with the retailer, Lowe's. The guys go through the company's history, as well as the different parts of its business, which include hotels, deepwater oil rigs, insurance, and containers. Learn how all of these segments work together; how Loews affords its hefty dividend sustainably; how the company does with buybacks and acquisitions; why investors shouldn't worry too much about the investment in the notorious deepwater oil space; what's so appealing about Loews over, say, companies like Berkshire Hathaway or Markel; and much more.
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This video was recorded on Dec. 19, 2019.
Nick Sciple: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, December 19th, and we're discussing Loews. I'm your host, Nick Sciple, and today I'm joined by Motley Fool senior analyst Buck Hartzell. How's it going, Buck?
Buck Hartzell: Good, Nick, thanks for having me! I think this is my first time on Industry Focus. This is great.
Sciple: Yeah, I think maybe you've been on with Jamo, but it's definitely your first time with me. I know we get to chat around the office. Now we get to chat on recording for the whole world to hear. How exciting!
Hartzell: That's right. It's exciting!
Sciple: I mentioned we're talking about Loews today. A lot of folks might think home improvement when you say that, but we're not talking about that Lowe's. What are we talking about today?
Hartzell: We're talking about Loews which is a mini-conglomerate type of company. You can think about this almost as a small Berkshire Hathaway. They own a bunch of other businesses. Some of those they have a controlling interest in are publicly traded, which is kind of nice. You can easily see what they're valued at and get financial statements on them. Others, they own 100% of them, and they're within their fold of things.
Sciple: Yeah. I think the history of this company is particularly interesting. You mentioned Berkshire Hathaway, a company that's been run by Warren Buffett going back to the 1960s. I think Loews in that the Tisch family has been running this company ever since that period of time. Two brothers founded the company. I think we're on the second generation running that company today. What is the role of the Tisch family in this company? How significant are they at the business?
Hartzell: They are significant. By the way, Loews is spelled different, as well. The ticker for Loews is just L. It trades on the New York Stock Exchange.
The Tisch family owns about 30% of the outstanding shares. That makes them billionaires, just like Warren Buffett. Just not quite as much. But, still very wealthy. A New York family. They've been around and involved in a lot of things, in philanthropy around that area, New York City. They're also operators. They're owner-operators. So we like it, they have a lot of skin in the game. They own a lot of stock. The ones that directly run the business own about 15% of the outstanding shares. We love that. We love owner-operators around here.
Sciple: Family businesses tend to have that long-term mindset, that long-term investment horizon that we like as investors here at The Motley Fool. One aspect of this business, you mentioned that they're a conglomerate like Berkshire Hathaway. When you look at a company like this, how do you pick it apart and analyze it as an investor to see what it's worth and whether it's worth investing in?
Hartzell: That's a good question, Nick. There's a couple different ways. For the lazy ones of us, and this is fine to do, since they have two publicly traded companies -- one of those is CNA, which is an insurer. And they own just shy of 90% of the outstanding shares for CNA. That's a pretty big insurance company. The valuation you can look at, times their shares, times their ownership. That's about $11 billion right there. And then, the smaller chunk is Diamond Offshore, which are these big rigs that do offshore oil discovery and help get the oil out of the ground deep underneath the ocean. That's also publicly traded. DO is that ticker. CNA is CNA. So, we could just take those two things and say, what's their valuation based on what they own of each one of them? And then, what are we paying for the rest of all this stuff? So, that's one way you can look at it.
The other way is to dig down in a little detail in each of the businesses. But if you're starting with Loews, I think the easy thing is, take the cash, take the debt out of there. They have a lot at the parent company, a lot of cash. They have some debt, too. But they're a net cash company. And then, the next part is just looking at the different businesses that they have. CNA obviously being the biggest of all those.
Sciple: You mentioned CNA and Diamond Offshore. There are a couple others that they own. Before we dive into those sub parts of the business, what are those other parts?
Hartzell: Sure. Just recently, they bought all of Boardwalk Partners. That's one of their companies that used to be publicly traded. They owned 51% of it, then they bought all of it. That's a pipeline business, I think about 14,000 plus miles of pipeline. It's at a very strategic area near the Gulf Coast, which is a great thing to have.
And then the other piece that they have is their hotel business. Ironically enough, that's a part that I think is overlooked by the market, for a couple reasons. One, they own it wholly. That's originally the way this company started, way back in the 1950s or so, when one of the young Tisches decided to get their parents to invest $125,000 into buying a hotel. So, they did that in New Jersey. And that kind of started the business off. And from there, they grew it pretty quickly and added more hotels, and then they started diversifying into other assets and buying other businesses. So, today, they own a nice set hotels. For those of you who like to travel down to Universal Studios in Orlando, Florida, if you stay at one of the Universal Studios, those are jointly owned by Loews, and those have been a very successful investment for them.
Sciple: Sure. Let's dive into those sub parts of the business. You mentioned the two publicly traded parts of the business. Together, if you mark those to market onto Loews, maybe that's $12 billion or so. For those other three parts, if you buy Loews today, you're maybe paying $3 billion. If you dive into the business, you'll see that they might be worth a little bit more than that. Maybe even the publicly traded companies might be worth a little bit more than that. Talking about CMA, this big insurance business that Loews owns about 90% of. Jim Tisch, the CEO of Loews, thinks they have a triple discount on those shares. Do you want to talk about why that discount might be there for CNA? And I think you own CNA yourself as an investment.
Hartzell: I do, actually, yeah, I like them. There's a company, and they've owned them since I think 1974. They've had a long run. If you go way back to the early days of CNA, it was kind of a medium-term property casualty insurer that wasn't anything special. But what they've done over time is, they've morphed this into a specialty insurance business. And it's done remarkably well. So much so that today, on average, the last couple years, they've paid out over a billion dollars in dividends, and about 800 million of those go to Loews because they're the largest shareholder.
The nice thing about CNA is, it trades for right around book value, which is a pretty cheap price to pay for a good insurer. Typically, the way we look at insurance companies is combined ratio, which is their expenses plus their loss ratios. If it's under 100, they're making money. And typically, CNA does make money every year, and they pay back a good chunk to Loews. They do that in the form of dividends. It's interesting, because Loews owns 90% of this company, they're not going to buy back much shares, because Loews already owns a ton of them. So, what they do is pay it out in dividends. And Loews is a big benefactor there. So, if you're looking at a company and you like with a nice dividend yield, this is a company where you're going to get about a 7% to 7.5% dividend yield. They pay a special dividend every year in addition to the quarterly dividends. So, if you like dividends, CNA might be a good company to look at.
Sciple: Yeah, it's very rare you can see a company with that big, fat 7.5% dividend yield, and you can look at it and say, "I'm comfortable that this company can pay this over time and sustain it." Jim Tisch, another thing that he mentioned about the insurance business is, in his 40 years in the industry, there's never been more disciplined, profitable business being written. So, in an environment where you've got a reasonably valued company with a really strong dividend yield, in an environment that's quite profitable, sustainable over time, appears attractive.
Hartzell: Right. I think his words have been borne out in the performance of the company. If you look at 2017 and 2018, they were some of the biggest catastrophe years on record, yet this company did great. Generated lots of profits. What he's saying, essentially, there's a lot more discipline in underwriting. I think there's also a lot more data that drives those disciplined decisions. I think he would say that, if you look at that whole sector, traditionally, it's been very volatile. You see good times and bad times. It's a lot less volatile than it's been, so he's saying this deserves a higher multiple as an industry. And he's like, if you look at us, we're right around book value. That seems really cheap for this good company. I think it's a good argument to say that he's right there.
Sciple: Yeah. It's funny, with all these conglomerates, somewhere in there, there's always an insurance business. I think it's just so attractive for these great capital allocators.
You mentioned catastrophes that have occurred. The other publicly traded portion of this business, you might be able to describe offshore oil over the last 10 years to have been catastrophic. I pulled a stat -- over the past five years, the stock's down about 82%. But it's not to say it's a totally valueless asset. There are some signs that there could be a turnaround there, and it provides kind of an upside option for Loews that folks may not value adequately.
Hartzell: The one thing that's nice is ... I'd say this is a lottery ticket, right? This is a small piece of the Loews puzzle. If you look, they own a little over 50% of Diamond Offshore. It's a relatively small company. So it looks like, OK, whatever. It's not that great, and it's in a bad part of the cycle. We know that. But here's the thing. These deepwater drillships, the fleets have been shrinking. As this industry's had a bad 10 years of business, the fleets have shrunk. You can't make these boats overnight. The day rates that they charge for some of these have dropped pretty precipitously. As a result, you have a stock that was $100 a share and now is around $6 per share. I mean, that's the devastation you see.
But in the good years, this is a company that was paying out hundreds of millions of dollars per year in dividends up to the parent company, Loews. I think it'll get back there. Again, the only hard thing to know is when that's going to actually happen. When are things going to change? Jim Tisch has talked about that on his conference calls. He's seen it happen in other industries as well. Cargo tankers, he talks about. What happens is, there's going to be a time where deepwater drill ships are in demand again. And when they are, the day rates are going to be very good, because we have a smaller fleet out there. Loews has a very up-to-date fleet. It's really good. They're not getting the prices that they'd like right now. But the good news is, the business isn't costing them that much. They're kind of buckled down. They've got all their expenses in a good spot. They will be there when the turn happens. We just have to find out when that's going to be.
Sciple: Right. These businesses are notoriously brutally cyclical. They have the permanent capital from Loews that lets them withstand these cycles. And then, one thing I looked at, you look at their capital structure. Almost all of their debt maturities are out to 2039 and later. So, if you're going to wait for the cycle to turn around, they really have a lot of time in that capital structure to wait for that to take place. That's really important when we've seen bankruptcies across this industry in very recent years.
Hartzell: Yep. They talk about this as having the best balance sheet in the industry. I think part of that is because they have the backing of big brother Loews and all the capital they bring to the table, they've been able to structure their debt and do those things and get deals done. And so, they're buckled down. They accept the reality of what it is. It will turn at some point, and at that point in time, dividends will come back to Loews at a much higher rate, which is nice.
Sciple: The other play that's in the oil and gas space is this Boardwalk Pipelines businesses. We can start talking about the privately held parts of the business. This is another business that cyclically hasn't been great from a valuation point of view, but Loews was able to take advantage of that to buy at a low price recently.
Hartzell: This was an MLP, a master limited partnership. The interesting thing about this is, Loews owned about 51% of the business. But they had a little thing in there. When the Federal Energy Regulatory Commission revised the rules that they had on MLPs, they basically said, "You can't take this income tax allowance and pass it along in your pricing anymore." That triggered a call option that Loews had, and they could basically buy the other 49% of the business they didn't already own. Guess what? It wasn't at a great part of the cycle, and they bought it very cheaply. So now, they own 100% of it. It's in a great area, down by the Gulf. 14,000 miles of pipeline. They've added a couple new projects onto that, which is going to increase earnings in the future.
What they've also had that's hurt recent-term performance is that a lot of these have long-standing contracts for pipelines, 10-year-old contracts. They were signed in 2008 or so, at what are now way-above-market rates. So they've had to redo those contracts. Instead of extending them out another 10 years, they did short duration contracts at much lower prices. Those will be locked in at higher rates when the rates are good again. And that will happen. They're investing. They're making this asset more valuable. And it's a very long-term asset that will generate good cash flows over the course of its life.
Sciple: We've talked about it on this show, you talked about the Gulf region. We've talked about the liquefied natural gas exporters, and how big of an opportunity that is, to take this gas that's really difficult to realize marketable prices that you can make money on here in North America. But as those assets open up to take natural gas overseas, where prices are higher, it opens up a lot of opportunities. If you're a midstream player that can help transport those fuels to the exporters, that's a great place to be. So, that geography is particularly valuable for Loews.
We mentioned, the valuations have come down as there's been some changes in tax law, those sorts of things. But the cash flows these businesses generate are consistent over time and very predictable, which is important for a company like Loews that is a capital allocator.
Hartzell: Yeah. We mentioned, one of the projects that they're doing actually connects their pipeline to one of the LNG terminals that's going to be used for export. That's going to be valuable for a long time. If we look back 10 years or so, we saw that even when they owned 50% of Boardwalk, it was hundreds of millions of dollars in dividends coming into them. Now, they own all of it. I think those numbers will get bigger as we look to the future, as the market gets better, and their pricing for contracts improves as well.
Sciple: Let's talk about the hotels part of the business, the namesake part of the business that bears the Loews name. Another aspect of this company that I think is interesting with the hotel business is, they try to play into a niche, areas that draw convention traffic or have some kind of demand driver. How does that play into their strategy?
Hartzell: Yeah, this is interesting. We've mentioned, this is where this company got their start. They didn't do a whole lot with hotels for a long time. It's one that I think people overlook. They own 100% of it. They bring a couple of advantages to the table. One, they operate the hotels themselves, and they're really good at it. These are higher-end hotels. The other thing is, they bring lots of capital, and they're willing to develop and build those hotels. Two of them that are coming online here, one is in St. Louis, so it's really adjacent to the Cardinals. If people like to go see Major League Baseball, they have a great location right there. If people want to go to the park, they're going to stay at that hotel. And they have one right next to the Texas Rangers as well. Those are in development, they'll be coming online soon.
The great thing about this hotel business is, they put about $800 million into it over the last several years. What they've seen come is, they took a good chunk of that out, and they doubled their earnings that are coming out of those hotels before tax. It went up over $200 million, it was $123 million and it went up to well over $200 million. And their net investment was about $140 million. They're seeing great returns out of that business. But here's the interesting thing. It doesn't really show up on the financial statements at Loews for a couple reasons. One is, they're developing those new hotels. They have to put in money. They're spending money on pre-opening costs. This past quarter, they had some hurricane issues that impacted their Orlando hotels. So, the amount of net income that Loews reported from these hotels was only $3 million in the quarter. That's down from $11 million the prior year. In reality, when you look at the hotels and the revenue rate and all that kind of stuff they have, these are way above average hotels. I think the hotels are worth anywhere from $5 billion to $8 billion. That's a big number, but if you look at comparable sales and things that have happened in that space, it's not unreasonable. So, this is one where the earnings, looking at $3 million in a quarter, it looks like it's worth nothing; in reality, this generates a lot of cash flow, and they're making investments. It's going to grow that business.
Sciple: I think the approach that they're taking is different from the industry as well. They emphasize they're owner, operator, developer altogether in one, whereas you see a lot of the industry, you maybe sign over to the rights to use your brand name, and you help manage the property, but you don't own or develop the hotel.
I think the niche that they play in really drives their value. You mentioned Orlando, how they're in partnership with the parks to develop those things. At some of their new operations -- you mentioned, by the ballpark -- they're working with the baseball team as well as another big family company, I think the Cordish family companies, to develop that sort of thing. And because they own and develop the property, they're able to form relationships that other hotel operators can't do.
Hartzell: Absolutely. And when they're right next to the demand driver, whether it be a convention center -- obviously, they have their namesake hotel right in New York City. They just remodeled. They put a couple hundred million dollars into that a few years ago. That's a beautiful spot, right there in downtown Manhattan. But, they have built-in demand drivers. What's seen as a cyclical business, the hotel business, it eliminates that. And then you just have a good cash flow model in the business. And when they become valuable money-producing assets, what can you do? Then you can refinance them. You take the money that you put out to develop them, and you can redeploy that somewhere else. There's two ways that those really valuable properties gain. One is in revenue. They can raise the rates and do all that kind of stuff. You can also refinance them. And they also go up with the value of the real estate. Because you find, some of these markets, when you put a hotel there and start developing around, the area around it starts to grow as well. And you look at five, 10 years down the line, and that real estate's become a lot more valuable than it was prior to you building the hotel.
Sciple: Yeah. This hotel business, when I first started looking at it, maybe I was a little skeptical. But as you look into their strategy, and the way they allocate their capital, and the niche they're trying to play in, I think it's a really attractive approach that they're taking up.
The last business that ties off the Loews family of companies is this Consolidated Container business, their most recent acquisition. They play in the plastic packaging business. What is the strategy there for Loews?
Hartzell: This is new. They haven't had a ton of disclosure. We know they paid $1.2 billion for the business. The great thing about this business, it's very fragmented. Since they've made that purchase just a year or so ago, they've added six bolt-on acquisitions. With $1.2 billion invested in six bolt-on acquisitions, they're allowing this company, which is the only one to retain all their capital, so they can reinvest it and buy more things. I think, with a fragmented market, you're going to see them grow and earn good returns on capital over time as well. And they haven't really priced any growth into that business, like I said, although they've done six acquisitions already, and there's going to be more to come.
Sciple: Yeah. They don't tell us a lot about the business. But they do tell us that those bolt-on acquisitions have been self-financed out of the Consolidated Container itself. The parent company, Loews, has not helped out with the financing of those acquisitions. That tells you something in and of itself of their ability to generate cash flows and grab up the rest of this market.
Hartzell: Yep, that's exactly right. That's what they're doing. And then, when they paid them, they paid 50% cash, and then they financed the rest.
Sciple: Bringing all these parts of the business together, you've got an insurer that seems to be a little bit undervalued, bottom-trough valuation on these energy businesses, and then a pretty dependable hotel business, and what appears to be a growing packaging business. When you put all that together, what do you make of the Loews valuation today, and the attractiveness of the stock?
Hartzell: Well, here's the great thing. The book value for the business is just under $65, about $64.90, and we're getting a stock that's around $50 right now. So, we're paying about 75% of book value for this business. That's not where it deserves to be. And as a result of that -- and we have people that own 30% of the stock, they're very cognizant of it. And their two jobs, basically, at the headquarters, is to allocate capital, and then to find great people to run their subsidiary businesses. And what they've done recently in the last 22 months, they bought back 10% of their shares. If you go back over the last 10 years, it's been 30% of their stock that they've bought back. That's a built-in catalyst that we have for this business to perform. If they can buy back that stock under book value, I think investors, at these prices, will benefit two ways. One in the regular growth of the business, and the second one is an increasing multiple on that stock price. It'll be over 1X book at some point in time, when people start to recognize. "Man, look at all the cash this thing's throwing off, and it's doing really well."
Sciple: Yeah. As I was looking at this business, you look at the past 10 years, owning the Diamond Offshore business, being heavily exposed to the MLP that's had a rough cycle -- even in the face of that cycle, you still see the stock up 40% over that period of time. Part of that is, is a large amount of buybacks being put back into the business, and the dependable-ness of the other cash-flow-generating parts of the business. What's attractive to me about this company is, you have these exposures to these parts of the energy market, particularly offshore, that appear to be so at-the-bottom-of-the-trough valuation of the cycle. So, you get the upside of that turning back around and realizing its true potential. As well, the safety of being part of this really dependable, permanent capital business. I think we talked about this before the show -- the capital allocation discipline of the Tisches, maybe you're more comfortable with than many that play in the energy industry.
Hartzell: Yes. One thing we noticed back when these energy companies were producing a lot of dividends, they sent them back home and they reinvested them in other things. So, unlike most energy companies where they get excited when things are going well, and they buy land and pay big multiples and make new investments. These guys are shrewd capital allocators. I love that part of the business.
And we have CNA, the good insurance company that's sending them $800 million in dividends a year. As we look forward, and we see turnaround in some of these energy businesses, it's not unreasonable to expect that this company is going to get a billion or $1.2 billion or $1.5 billion in dividends coming in each year. The question is, what will they do with that capital? I can tell you, if the stock price is cheap, they'll buy back their stock, and it'll do very well.
Sciple: Jim Tisch has said on conference calls, with heightened valuations with the way private equity is today, they don't foresee making a big acquisition today. That means, if you have excess capital, what you're likely to do is, particularly at a company that's trading significantly below book value, you're going to see those shares be bought back over time. We've seen that over a period of time. But, you're not only buying a company that is trading what appears to be below the valuation of the sum of its parts, but you have the management pumping a bunch of cash into buybacks to you as a shareholder, which I think provides upside.
Hartzell: Yeah. That's one thing I really like. I like conglomerates. I don't mind that they trade at a discount, as long as they're well-run businesses. One of those is Berkshire Hathaway. Another one is Markel that we like here and talk quite a bit about. Those companies are trading closer to 1.5X book. The nice thing that we have about Loews that's different from Berkshire -- Berkshire has been reticent to buy back shares. They've started to buy back a little bit recently, relative to its huge market cap. Loews is willing to buy back hand over fist when the price is right. But they're very strategic. And they've done a good job of it over decades. I'm very confident that they won't overpay for buybacks, they'll do them at the right time, and that's going to create a building catalyst for the rest of us, the shareholders. I like that.
Mr. Buffett, maybe you should buy back a little bit more stock, particularly when it's cheap.
Sciple: Hey, I hope you're listening.
Hartzell: I'm sure he is.
Sciple: Buck, thanks so much for coming on the show! I hope we'll have you on again soon.
Hartzell: Thanks for having me, Nick. I appreciate it!
Sciple: As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for his work behind the glass. For Buck Hartzell, I'm Nick Sciple, thanks for listening and Fool on!
