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Leucadia's Neutral Rating Reaffirmed

BX AINV

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We recently maintained a Neutral recommendation on Leucadia National Corporation , expecting the company to perform in line with the market.

Leucadia’s extensive diversifications into a variety of businesses including manufacturing, oil and gas drilling services, gaming entertainment, real estate activities, medical product development operations and various other investment activities bode well for the future growth of the company.

Moreover, the acquisition of Nation Beef Packaging Company, LLC, has added a new dimension to the company’s existing portfolio. Starting the first quarter 2012, the company commenced with its beef processing services. The new business accounted for roughly 89% of the company’s second quarter 2012 total revenue.

Despite these positives, the company has to grapple with issues like rising cost of cattle; the prices of which are beyond the company’s control. This limits the business from flourishing and accounts for a major portion of the company’s total cost of sales. Also, animal health and disease issues restrict growth while geopolitical risks act as a major impediment to international trade growth.

Moreover, general housing market weakness, investments in volatile materials, and intense competition from its peers including Apollo Investment Corporation (AINV - Snapshot Report) and The Blackstone Group (BX - Analyst Report) add greatly to our concerns for the company.

Second quarter 2012 was not very exciting for the company as results plummeted badly and entered the negative zone resulting in a loss per share of 81 cents. This is in comparison with the earnings of $1.97 in the first quarter 2012 and 74 cents earnings in the year-ago quarter. Expenses rose in the quarter from just $234 million in the year-ago quarter to $2.1 billion, representing roughly 96.7% of total revenue.     

The current Zacks Consensus Estimate for the third quarter of 2012 is 42 cents, representing a year-over-year growth of 135.3%. Estimates for 2012 and 2013 are at $3.35 and $1.68, respectively.
 

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