Loews Looks Like a Real Bargain

 | Mar 20, 2012 | 12:30 PM EDT
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Look closely enough at this robust market, and you can still find some intriguing opportunities. One of strongest candidates I have come across recently is the conglomerate Loews (L). Loews is a collection of businesses and investments that, on the basis of its current market valuation, is essentially giving you a part of the business for less than 20% of tangible book.

Loews is an industrial conglomerate that was founded more than 50 years by the Tisch family. While a history of the company is beyond the scope of this article, Loews has a history of brilliant capital allocation, beginning with founders Robert and Larry Tisch. Starting as a movie theater chain, Loews has morphed into something bigger and better.

Today, Loews is a $15.7 billion market company, and the vast majority of its current value is attributable to majority-owned stakes in three publicly traded subsidiaries. Loews owns 90% of the insurance company CNA Financial (CNA), 50.4% of the oil and gas drilling rig company Diamond Offshore (DO) and 66% of the natural gas pipeline owner Boardwalk Pipeline Partners (BWP).

On the basis of the current market caps of these three companies, Loews' proportionate interests equate to a value of $15.9 billion. So the market is essentially paying you $200 million for Loews' other assets, which, according to the company's financial statements, have a tangible book value north of $3.5 billion. This is not a typo. At current valuations, Loews is offering $3.5 billion of assets for free.

The company's remaining assets reside in three areas: the energy company HighMount, Loews Hotels, and a collection of cash and investments. HighMount is an oil and gas exploration-and-production company that had tangible equity of $1.4 billion at year-end 2011. HighMount has had operational issues in the recent past that have resulted in impairment charges. The majority of HighMount's energy product is gas, and at current prices of $2.50 per Mcfe, this continues to hurt HighMount, which currently has an average cost of around $3.25 per Mcfe. 

The hotel business consists of 17 high-end properties in the U.S. and Canada that have tangible equity of $190 million. As you might imagine, occupancy rates at hotels have been depressed for several years. Occupancy rates at Loews properties are improving but are obviously still below pre-recession levels. 

The cash and investments at the holding-company level have tangible equity of $2 billion and include the general partner interest in Boardwalk Pipeline, along with 23 million Class B units. In addition, Loews has a cash and investment portfolio about which it provides little comment. I will rely on the company's 50-plus years of making sound investment decisions and presume that this portfolio is relatively conservative and not loaded with derivative-type securities. 

Clearly, Loews derives a vast majority of its current market value from its holdings in CNA Financial, Diamond and Boardwalk. That valuation is clearly subject to the market prices of those three companies. But the huge disconnect between the sum of the parts and Loews' current market cap is, I believe, too wide. When you strip out the value of CNA Financial, Diamond Offshore and Boardwalk Pipeline Partners, the market is essentially saying that the oil and gas reserves, along with other investments in real cash-flow-producing businesses, are worth nothing. HighMount will likely have a tough year in 2012, absent a surge in natural gas prices. But I don't believe that losses this year or next year justify ascribing a negative value to all the remaining assets. 

Of course, any market pullback that sends shares of CNA, DO or BWP lower changes this dynamic. Even so, at today's valuation you are getting $3.5 billion of tangible equity for free. Even a moderate decline in the market value of the three large positions would not erode the margin of safety in owing all of the other assets. 

Also, investors could protect themselves against such a decline by shorting proportionate interests in CNA, DO and BWP. All in all, in today's increasingly value-less market, Loews offers superior value along with excellent management. It has moved to the top of my watch list.

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