Leucadia National (LUK) – Where’s the Beef?

On Friday, March 3rd, there were buyers of 1,000+ April 25 Calls for 2.00 – 2.05 as well as buyers of 1,800 April 26 Calls for 1.30.

Leucadia is a very interesting company as it engages in investment banking and capital markets as well as in beef processing, manufacturing, oil and gas exploration, and asset management. At their October Investor Presentation, Leucadia showed off all of their moving parts:

From the looks of it, Oppenheimer is the only sell-side firm with coverage on this name and they began to see better numbers out of Leucadia after its Q2 results last June. On June 23rd, they reiterated their Outperform rating and $22.00 price target on LUK as Jefferies reported strong operating results. Analyst Chris Kotowski commented, “Jefferies, LUK’s largest subsidiary accounting for more than half the company’s value, reported a good rebound in operating results for 2Q16 on June 21. Admittedly, this comes after a dreadful 1Q16 print, and the trajectory of “core” results is still somewhat muddled, but it was a solidly profitable quarter. Further, we think the results in any case validate our assumption that Jefferies should be worth at least tangible book value, which was our prior assumption.”

Then, on November 30th, Oppenheimer was out raising their price target to $28. As they put it, this move mainly reflects the strong appreciation in peer investment banking company valuations in recent weeks. However, the commentary that caught my attention was regarding its investment in National Beef. According to Oppenheimer, “NB has turned EBITDA from losses in ’15 to $$300M in ’16 and will now likely be sold. Once NB is sold we believe it will ~10%+ accretive to LUK’s TBV, and will give LUK’s parent company balance sheet plenty of firepower in terms of capital and liquidity to pursue other investments.”

Fast forward to February 27th, 2017 in which the company reported its Q4 numbers. Rich Handler, CEO of Leucadia, and Brian Friedman, President of Leucadia, said: “Leucadia’s fourth quarter 2016 results reflect a solid finish to the year, including better performance at Jefferies and another quarter of record profits for National Beef.” Jefferies showed strong performance in investment banking, solid performance from its core equities business, and continuing significant improvement in fixed income. National Beef benefited from strong demand and more than ample supply of cattle, which together resulted in excellent margins throughout the quarter. Jefferies and National Beef, our two largest businesses, have regained their stride, and the rest of our businesses are in solid shape and well positioned as we enter 2017.

Here are the upcoming catalysts to keep in mind:

• Q1 Earnings in early-May
• Annual Meeting of Shareholders – May 25th