Leucadia Takes a Hit as FXCM, HRG Weigh

By Dan CaplingerFool.com

Image: Leucadia's Jefferies Group.

Among value investors, Leucadia National has a strong reputation for long-term excellence, with business ties to Warren Buffett's Berkshire Hathaway through its Berkadia venture. Leucadia's presence within a number of seemingly unrelated businesses makes it a true conglomerate, but it also exposes it to a wide range of business conditions in different industries. Coming into its third-quarter financial report on Thursday, Leucadia investors had seen the stock take a substantial hit due in part to concerns about whether the company was on the right track. Leucadia's results included extensive charges on some of its ventures that contributed to a net loss for the period. Let's take a closer look at Leucadia to see whether investors should be concerned about its latest results.

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Leucadia sees redLeucadia's third-quarter results continued a downward trend that investors saw last quarter. Revenue dropped 21% to $2.37 billion, and the company posted a GAAP net loss of $173.2 million, far worse than the $54.7 million profit it earned in the third quarter of 2014. That worked out to a per-share loss of $0.47, compared to last year's earnings of $0.14 per share. Even after excluding the impact of the sale of the company's Bache unit, adjusted losses of $0.35 per share were still substantial.

As we've seen in past quarters, charges related to a couple of its business units weighed on Leucadia's overall results. Leucadia recorded a $113.2 million fair-value change for the company's investment in foreign-exchange trading firm FXCM due to unrealized and realized losses, interest income, and fees from the FXCM investment. Similarly, Leucadia saw the fair value of its investment in diversified company HRG fall $59.2 million during the quarter.

A closer look at Leucadia's financials shows more widespread difficulties that the company has faced. The beef-processing services business, which includes Leucadia's 79% interest in National Beef Packing and brings in the lion's share of Leucadia's revenue, suffered a 6% drop in sales, and it swung from a year-ago profit to a pre-tax loss of $31.7 million during the third quarter of 2015. Leucadia said that the impact of trying to rebuild cattle herds has caused some stress for the business.

Meanwhile, the Jefferies financial services business saw revenue plunge by nearly a third, almost wiping out the unit's pre-tax income from the previous year. Jefferies saw fixed-income trading revenue plunge by more than 90% in its third quarter.

CEO Rich Handler was nevertheless optimistic about Leucadia's overall performance. "The balance of our businesses are either contributing well to our results or continue to create long-term value that isn't yet manifesting in a material way in our GAAP earnings," Handler said. "We are pleased that our more established businesses, including Berkadia, Garcadia, Conwed, and Idaho Timber, continue to provide strong returns on tangible equity."

Can Leucadia bounce back?Leucadia also thinks that conditions will improve next year. As Handler noted, "We are encouraged by the direction and momentum at HRG and FXCM and look forward to meaningful progress in the fourth quarter and 2016. We are optimistic we will see meaningful improvement at Jefferies and National Beef in 2016."

Leucadia's optimism also manifested in extensive activity to buy back shares. The company repurchased 4.4 million shares at an average price of $20.79 per share, working out to around $91.5 million. That's not a huge amount for a company with a market capitalization of $7 billion, but it nevertheless reflects the confidence that company executives have in using shareholder capital in that manner. Certainly, investors have taken it as a positive sign when Berkshire Hathaway chose to buy back shares at relatively inexpensive prices compared to book value, and Leucadia's price-to-book ratio is much more attractive, reflecting the concerns that some investors have about the carrying value of assets on its books.

Despite the company's attempts to remain upbeat, Leucadia investors didn't react well to the report, sending the stock down 3% following the announcement. Long-term shareholders want to see more evidence of progress with some of Leucadia's major investments, and until conditions improve, the stock could continue to go through its current rough patch.

The article Leucadia Takes a Hit as FXCM, HRG Weigh originally appeared on Fool.com.

Dan Caplinger owns shares of Berkshire Hathaway. The Motley Fool owns shares of and recommends Berkshire Hathaway and Leucadia National. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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