A Look at Loews: Hotels, Energy & Insurance

05/28/2020 5:00 am EST

Focus: STRATEGIES

Adrian Day

Chairman and CEO, Adrian Day Asset Management

Conglomerate Loews (L) is having a rough time, with several of its holdings severely hit by not only Covid restrictions but by broader market conditions as well, asserts Adrian Day, editor of Global Analyst.

First, its struggling, majority-owned Diamond Offshore succumbed to weak oil markets by filing for bankruptcy. Its investment income at its CNA insurance unit declined sharply. And virtually all its hotels have closed and laid off 90% of staff amid travel restrictions.

All this contributed to a loss for the quarter of $632 million loss, over $400 million of attributable to a no-cash impairment on some of Diamond Offshore’s rigs. And the current quarter won’t be better. It will write down its carrying value on Diamond this quarter.

The bankrupt shares of Diamond Offshore are currently trading at 20 cents in the pink sheets, down from $7 a share at the beginning of the year (and over $100 a share before the 2008 credit crisis).

Loews’ carrying value at quarter-end of over $1 billion; that will be slashed to about $15 million (in a non-cash loss). Given the bankruptcy, Loews no longer controls Diamond, and so will no longer consolidate Diamond’s earnings.

Some units, however, are doing well. CNA’s operations have been strong, driven by lower expenses as well as rate increases. Its business interruption policies do not play on the virus related closures. But the decline in interest rates will affect its ability to earn on its reserves.

Boardwalk Pipelines is doing well, notwithstanding the decline in the weakness in the O&G sector. Its plastic packaging manufacturer, Altium has benefited from a surge in demand from the retail side during the virus shutdowns.

Looking ahead, the hotels should start to come back, though it’s unknown how much demand there will be, especially in the near term.

The company has lots of cash to see it through. The balance sheet remains rock solid, with over $3 billion in cash and investments held at the parent level (80% of that in cash and equivalents), and no significant calls on cash.

Given its emphasize on maintaining liquidity, the company has repurchased no shares since quarter end, after buying back almost 10 million shares during the first quarter.

Loews is undervalued on an asset basis. At quarter end, its book value was $60.28 per share. Even after the expected Diamond write down, book value would be around $53.60.

 The current market value of Loews’ interest in CNA alone, accounts for around 90% of this value. So it is unquestionably undervalued and has a solid balance sheet. Patient investors can buy Loews on any dips.

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