Matt Franz : Zealous For Knowledge

Loews

In the 1970’s there was a flood of oil coming out of the Persian Gulf. This lead to a huge increase in the global VLCC (Very Large Crude Carrier) fleet. But in the early 1980s the Iranian Oil Embargo caused oil prices to shoot up. Demand went down and suddenly there were a lot of unemployed VLCCs sitting around.

The big oil companies wanted to get rid of their extra ships. The ships had a scrap value of $6 million because of the steel they contained. But it cost $1 million to tow a ship from Europe to Southeast Asia where the scrap yards were. So the VLCCs were offered on the market at $5 million.

Enter Jim Tisch, the current CEO of Loews:

We bought these ships like you buy hamburger meat, but instead of dollars per pound of hamburger it was dollars per ton of steel. The market for the ships had collapsed. We thought it could be an interesting investment because there wasn’t much downside, as the ships were trading for scrap value, and we figured maybe something good could happen.

The ships cost $50 million new. With used ships floating around for $5 million, Tisch knew there would be no new supply. And scrapping would continue to reduce supply. Furthermore, he thought that the decrease in demand for Persian Gulf oil was likely to be temporary, not permanent. Eventually these forces would bring the market back into equilibrium. And if it didn’t Tisch could always get his money back by scrapping the ships he bought.

Tisch ended up buying several ships – from Exon and Shell no less. Shouldn’t they be informed sellers?

The people that were in the business that owned the ships thought the ships were a plague on the market. They were focused on the shipping markets and their own need for the ships. They weren’t thinking like an investor or speculator.

Shortly after Tisch started buying the VLCC market turned. He made millions chartering the ships out for years, and then got his principle back when he eventually scrapped them.

I tell this story because it’s one of my all time favorites of investing. It’s simple. There’s a huge and obvious margin of safety (no spreadsheet necessary). And there’s variant perception: Exxon and Shell were preoccupied managing their larger operations to care much about what was going on in the VLCC market. They were trying to minimize and maximize different variables than the Tisch’s. As a result, there was non-economic selling. To get a bargain you need to buy from a forced or non-economic (non-price sensitive) seller.

I came across this story again the other day, which reminded me to check back in on Loews. Loews is a holding company run and controlled by the Tisch family. They practice a form of value investing that’s more Ben Graham or Walter Schloss than Phil Fischer or Charlie Munger. This has gotten them into some ugly industries like offshore oil drilling. But they’re also into some decent industries, like insurance and pipelines.

Their biggest investments are publicly listed, which makes a sum-of-the-parts easy. I haven’t dug into their subsidiaries in a while, but I would note that their offshore business is likely closer to the bottom of its cycle than the top.

 

Symbol Name Market Cap (B) % Owned Value Owned (B)
CNA Cna Financial Corp 14.33 90% 12.90
DO Diamond Offshore Drilling Inc 2.78 53% 1.47
BWP Boardwalk Pipeline Partners, LP 3.40 51% 1.73

Loew’s owns about $16 billion of public securities. They also own 100% of Loews hotels. These have produced a steady $11-12 million of net income the last couple of years. I’m willing to put a 10-15x multiple on that. For valuation purposes I’m going to take the midpoint (12.5x) and say they’re worth $150 million. This a small enough slice of the pie that it doesn’t move the needle much anyway.

Then I add in the parent company cash and investments, net of debt, to arrive at a final value.

 

Billions
Public Securities 16.07
Hotels 0.15
Cash & Investments 5.00
Debt -1.80
Total 19.42
Shares Out. (mil) 337.00
Per Share 57.63
Market Price 51.62
Upside 11.65%

This shows the company is a little undervalued right now, but nothing serious. Holding companies often experience some discount to their parts. Note that the figures I used for public securities were current, but the cash, investments, and debt figures are from their last annual report.

Once last thing to note about Loew’s is that it is what Charlie Munger would call a cannibal.

Source: 2016 Annual Report

Shares outstanding have decreased at a 4.7% CAGR over the last ten years. They state: “In every decade since 1970 we have repurchased more than one-quarter of our outstanding shares.”

But they still exercise some discipline:

Unlike some companies, we do not repurchase our stock robotically or set annual repurchase quotas. Rather, we seek to buy back our stock when it’s below our estimation of its intrinsic value and when prevailing market conditions seem conducive. While we remain positive on our shares and see great potential for our subsidiaries, we did not see the wisdom of buying back shares in an exuberant equity market. We are more comfortable buying back our shares when the market is not hitting new highs. Over the span of time, measured in years and decades, we are proud of our record and we feel that our share repurchases have created significant value for our shareholders.

I don’t see a huge immediate opportunity in Loews. But I like management and I think that it would be a decent investment at the right price. It’s one I will continue to watch.

Questions or comments? Email matt@eaglepointcap.com

This is not a recommendation to buy or sell any stock mentioned. I do not have a position in any stock mentioned unless otherwise noted in this post. Do your own research: you are accountable for your own returns. Please read my full disclosure



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