A quick glance at Loews Corporation's (NYSE:L) fourth quarter and year end results issued February 9 might lead one to believe that the New York-based holding company, founded and still operated by members of the Tisch family - owners of 23.3% of the company's stock - is in need of new management. A closer look, however, reveals an extremely healthy company that is more than ready to handle anything this economy throws its way.
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Loews lost $958 million in the fourth quarter from continuing operations, down over $1.2 billion from the same period in 2007. For the entire 12 months of 2008, it lost $182 million from continuing operations, a reversal of the $1.8 billion year-over-year figure. Such drastic declines has caused the company's stock price to sit at its lowest point since 2004. However, a review of the individual results of its operating divisions tells a different story. CNA Financial (NYSE:CNA) was the hardest hit in 2008, generating $9.1 billion in revenue, down 10.8% from $10.2 billion a year earlier. Of the four remaining segments, three increased sales. Diamond Offshore Drilling (NYSE:DO), its 50.4%-owned manufacturer of drilling rigs, grew by 33.2% to $3.5 billion. HighMount Exploration, a wholly-owned natural gas producer, saw its revenues jump 181% to $770 million. Transporting natural gas instead of producing it, 74%-owned Boardwalk Pipeline's (NYSE:BWP) revenues increased 26.4% to $848 million and Loews Hotels, another wholly-owned subsidiary, generated revenues that were flat with 2007, at $380 million. A sixth division, watch-maker Bulova, sold for a $75 million gain in 2008.
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Probably the biggest event of the year was the company's exchange of its Lorillard (NYSE:LO) stock for Loews stock in a tax-free non-cash gain worth $4.3 billion. As a result of this one-time gain, Loews made $4.5 billion in 2008, which is $2 billion more than the previous year. Another way to look at Loews results in 2008 is to back out the $1.3 billion in investment losses at CNA Financial and the $1.2 billion in non-cash impairment charges at HighMount Exploration. Doing so changes 2008 revenues to $14.54 billion, with expenses of $11.49 billion, leaving it with $3.05 billion in income (before taxes and its minority interest), which is only marginally lower than the its 2007 income of $3.2 billion.
Before you get all giddy, it is important to remember that these investment losses are real and do affect Loews's bottom line. The purpose of this example was to illustrate that the operational differences between 2007 and 2008 were not as great as the results would seem to indicate. (Impairment charge refers to the writing off of worthless goodwill. Learn more, including its potential impact on EPS, at Impairment Charges: The Good, The Bad and The Ugly.)
During the fourth quarter conference call, President and CEO James Tisch emphasized that CNA's core property and casualty business is performing well. While the insurer's investment portfolio took it on the chin in 2008, its operations are producing significant positive cash flow. In addition, it plans to hang on to its available-for-sale securities until their prices recover or mature and, at that time, Loews's book value will increase from its current $30.17 per share. (The company's book value has grown in the past five years at a compounded annual growth rate of 8.8%, despite the decrease in 2008.) Its stock currently trades at a price-to-book ratio of 0.70, well below its five-year average of 1.25. On that basis alone, its stock price is about half of what it should be. In addition, its current price-to-sales ratio is 0.69, a valuation last seen in 2003. Any way you slice it, Loews stock appears to be trading at a discount. (Take a look at how certain critical factors can influence this ratio at Use The Price-To-Sales Ratios To Value Stocks.)
Loews is a very conservative company. It finished the year with $2.3 billion in cash and short-term investments and only $866 million in debt. Ideally positioned to weather the current economic storm, as holding companies go, this is one of my favorites.