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Leucadia Takes a Big Hit From Capital Market Volatility

By Dan Caplinger - May 4, 2016 at 6:55PM

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The conglomerate's first-quarter results included a sizable net loss and large revenue declines.

Image: Leucadia's Jefferies Group.

The worst time to be involved in investment management is when markets turn volatile, and Leucadia National's (JEF 1.12%) exposure to the financial markets has led investors to punish its stock over the past year. Coming into Wednesday's first-quarter financial report, Leucadia investors were preparing to see a sizable net loss from the recent pressure on some of its core businesses, but even they didn't foresee the extent of the red ink or the pressure on overall revenue. Let's take a closer look at the latest from Leucadia National and whether the company can rebound in the near future.

Leucadia rides the markets downward
Leucadia's first-quarter results showed the difficulties that the company has faced lately. Net revenue dropped by more than a third to $2.02 billion, which was only a bit less than what most investors were expecting to see. Yet the company reversed a year-ago profit in losing $222.9 million, and that worked out to a net loss of $0.60 per share. That was far worse than the $0.43 per share consensus loss forecast among investors in Leucadia.

Looking more closely at Leucadia's report, the company listed a number of items that hurt the company's results. The Jefferies brokerage unit reported a first-quarter loss of $245.8 million, which represented more than the total net loss for the company as a whole. Leucadia also had to reduce the fair value of its investment in FXCM by $53.2 million. Leucadia commented that some of its Leucadia Asset Management platforms suffered a difficult investing environment, holding back the company's overall results.

On the plus side, some aspects of Leucadia's results were more positive. The company said that its National Beef unit posted solid results. The Berkcadia commercial real estate agency and the Garcadia automotive-group joint venture also featured strong performance, and Leucadia cited higher share prices for its HRG investment company as helping its overall results.

CEO Rich Handler was realistic about the company's performance. "Leucadia's first quarter 2016 results were affected by the volatile and turbulent period in the capital markets," Handler said, "which primarily affected Jefferies and our other market-sensitive businesses." The CEO also noted that continued volatility could weigh on future results as well.

Can Leucadia bounce back?
Yet on the whole, Leucadia is pretty optimistic about its long-term future. In Handler's words, "Benefiting from improved market conditions, the range of changes we implemented last year and in the first quarter, as well as the continuing hard work of our entire team, Jefferies' performance in March and April has improved significantly." The CEO also pointed to "a meaningful turn in the fortunes of National Beef on the back of the cattle herd rebuilding," and positive trends in key markets could make this the low point in the cycle for many of Leucadia's subsidiary businesses.

Yet some people are concerned that Leucadia is falling into the classic conglomerate trap by trying to do too many things at the same time. For instance, in late April, reports surfaced that Leucadia and privately held restaurant chain Landry's might be working together to launch a special purpose acquisition company, or SPAC. The purpose of the SPAC, which is reportedly to be dubbed Landcadia, would be to buy a business interest in the restaurant, hospitality, or gaming industry, with investors essentially putting up money up front before knowing exactly what the SPAC's acquisition target will eventually be. Given the large number of different businesses that Leucadia investors already have to track and follow, adding yet another doesn't necessarily make the most sense at this point.

Leucadia investors generally didn't have much enthusiasm for the stock after the news, sending the stock down another 1.5% in after-hours trading following the announcement. The recent market rebound should make Leucadia's near-term prospects better if it lasts, but in the long run, the company probably needs to simplify its corporate structure to give investors the assurances they need about its future.

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