Leucadia Retains Neutral Rec

We recently maintained a Neutral recommendation on Leucadia National Corporation (LUK - Analyst Report), anticipating the company to perform in line with the market.

Leucadia, headquartered in New York and founded in 1854, is a well diversified company having exposure to manufacturing, oil and gas drilling services, gaming entertainment, real estate, medical product development operations and various other investment activities.

The company is well known for its meaningful acquisitions and dispositions of non-core or non-profitable assets. Of the many acquisitions, particularly the recent one of National Beef Packaging Company, LLC, has added a new dimension to the company’s existing portfolio. The new business accounted for roughly 87% of the company’s third quarter 2012 total revenue.

Of late the company also fully disposed of its remaining stake in Fortescue for net cash proceeds of approximately $152.9 million, putting an end to the pursuit started in 2011. Moreover, Leucadia bought the remaining stake in Jefferies in an all-stock deal. Both these transactions are likely to bode well for Leucadia, with Jefferies merger to open up new investment opportunities.

Despite these positives, the company has to grapple with issues like the 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. Apollo Investment posted earnings of 22 cents while The Blackstone Group posted earnings of 55 cents for their respective quarters ending September, 2012.

The current Zacks Consensus Estimate for the fourth quarter of 2012 is 59 cents, representing a year-over-year growth of 28.3%. Estimates for 2012 and 2013 are at $3.78 and $2.49, respectively.