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What Leucadia's Latest Results Say About Its Future

By Dan Caplinger - Sep 1, 2015 at 11:47AM

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The conglomerate has a huge range of businesses under its umbrella, but beneath it all lies a value opportunity.

Leucadia's Jefferies unit is a key part of its overall success. Image source: Jefferies Group.

Most investors know about Warren Buffett and his long-term success, with the Oracle of Omaha having put together an impressive combination of wholly owned businesses and other investments under one corporate umbrella. Conglomerate Leucadia National (JEF 3.57%) has used a similar philosophy, with its primary Jefferies Group subsidiary giving it exposure to investment banking and capital markets even as Leucadia also owns a host of unrelated markets in everything from beef processing to oil and gas exploration. In its second-quarter financial report last month, Leucadia continued to make a case for why its shares offer investors the chance to buy shares at a bargain price. Let's look more closely at how Leucadia did during the first half of 2015 and what could lie ahead for the conglomerate going forward.

Leucadia keeps on pushing forward
On their face, Leucadia's second-quarter results seemed somewhat lackluster. Revenue edged downward to $2.84 billion, and net income fell by more than three-quarters from the year-ago quarter's results. Yet much of the decline came from Leucadia's decision to write down its investment in foreign-exchange trading firm FXCM by more than $112 million, reflecting the substantial drop in FXCM's share price.

Yet looking more closely at Leucadia's diverse businesses gives investors a better view of the pluses and minuses of the overall business. In financial services, the Jefferies unit has seen strong performance, with revenue up 22% year over year as both the equity and fixed-income divisions of the investment bank have contributed to substantial gains. Meanwhile, Leucadia has seen early success with several new initiatives, including the Folger Hill, Topwater, and Mazama businesses. The Strategic Investment division had positive results in the first half of 2015 and is looking for ways to build itself up further. The company's Berkadia property-financing partnership saw originations more than double in the first six months of 2015 from last year's levels, and Leucadia's Specialty Finance platform grew by two-thirds from year-ago figures.

Leucadia's other business had more mixed performance. Italian fixed-wireless broadband servicer Linkem and plastics-manufacturer Conwed saw substantial growth, as did the company's Garcadia vehicle-sales business. Yet the National Beef and Idaho Timber units didn't do as well, with the timber company plagued by weak market prices and the beef market seeing weak supplies affect processing volumes.

Leucadia also has extensive energy holdings, which have exposed the company to the difficulties in the oil market recently. Operations include the Juneau Energy unit's holdings in the Eagle Ford area of Texas and Vitesse Energy's Bakken holdings. Meanwhile, the Oregon LNG venture is still working to get permission for its liquefaction and pipeline projects in the Pacific Northwest, with the company saying that it "continues to slog through the slow process" without being able to predict a fixed end point.

Why Leucadia is worth a closer look
Perhaps the most important argument favoring Leucadia right now is the discount that investors have already put on its shares compared to its book value. With the stock's recent downward move below $21, Leucadia trades at more than a 25% discount to its $28.52 per share book value at the end of June, and while the recent market pullback might augur a slight reduction to book value by the time the current quarter ends, Leucadia nevertheless arguably has more room to rise than to fall.

Leucadia isn't without risk. For instance, one reason its energy holdings haven't weighed it down more extensively is that the company has been smart about hedging its production well into the future. Hedges extend through 2020, with prices for 2016 production locked in at around $57 per barrel and price floors of $50 per barrel for 2017, 2018, and 2019 that still give the company's oil units some upside potential if prices recover. Nevertheless, if oil doesn't bounce back by then, then Leucadia could suffer even more extensive declines.

Moreover, the company has sustained losses as a result of Jefferies' exposure to the energy arena. Reports last week suggested that Jefferies has lost as much as $100 million this year due to bets gone badly on its energy-industry distressed-debt investments, as some weaker energy companies start to look at bankruptcy as their only option. If that trend continues, investment banks that have extensive holdings in energy-related debt could see further losses.

Nevertheless, Leucadia investors are getting a substantial margin of safety in exchange for being willing to assume that risk. Even as the stock falls, those who see Leucadia as a long-term opportunity can instead focus on the value proposition that a discounted share price offers.

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