Stock Watch

Leucadia National: An Enviable Track Record

Companies mired in bankruptcy and turmoil may look ugly to some investors. But to Ian Cumming and Joseph Steinberg they're downright foxy. Using their publicly traded investment firm, Leucadia National (LUK), the duo have built a reputation as master takeover artists who buy distressed companies at discount prices, revive them and sell them for hefty profits.

In many ways, Leucadia follows Warren Buffett's blueprint of buying on the cheap. Cumming and Steinberg even teamed up in 2001 with Buffett's Berkshire Hathaway to bail out a troubled lending operation, in a partnership called Berkadia.

Leucadia and Berkshire had more in common in the '80s and '90s, when Leucadia's primary focus was insurance. Today, Leucadia controls a diverse stable of companies, including a fiber-optic-network operator, a health-care-services company, a plastic-netting producer, a copper mine in Spain, wineries in California and Oregon, and several real estate ventures.

Leucadia's long-term record is extraordinary. Tom Meehan, manager of Meehan Focus, says Cumming and Steinberg "are two of the smartest guys in the business world. They're experts at buying and selling depressed companies, and they make a lot of money for shareholders."

That's an understatement. From the end of 1978 through the end of 2004, Leucadia's stock soared an annualized 33% (compared with 27% for Berkshire's A shares). Together, Cumming and Steinberg own 25% of Leucadia, which has a market value of $4.6 billion.

Leucadia started off 2005 on a rough note, dropping 28% in the first two months of the year. The culprit: WilTel, a large fiber-optic network that Leucadia acquired out of bankruptcy a few years ago for $780 million. In January, WilTel lost its biggest customer, SBC Communications. Cumming and Steinberg don't grant interviews. But in an engaging, Berkshire-esque letter to shareholders early this year, they expressed confidence that WilTel would not "become road kill on the telecom highway." Leucadia's stock has recovered nearly all of those early 2005 losses.

Cumming and Steinberg have another problem. Much like Buffett, they're having trouble finding attractively priced merchandise. As a result, Leucadia sits on some $1.6 billion in cash. The shareholder letter underscores the bosses' discomfort: "It is difficult to remain disciplined and on the sidelines in a game we love."

Earnings aren't especially helpful in judging a company like Leucadia. Morningstar's Justin Fuller says that on the basis of Leucadia's balance sheet, investments and expected future acquisitions, the stock is worth $45 -- barely above the recent price. "This company's strength lies in its ability to create value where others can't and put its money to work when others are not," says Fuller.

Investing in Leucadia is a vote of confidence in Cumming and Steinberg to put their cash hoard to work as effectively as they have in the past. At $42, Leucadia trades at about 1.3 times book value.

--Katy Marquardt

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