Loews (L): Invest in This Conglomerate or Its Holdings?

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Be sure to check out our detailed stock analysis (click here). Loews (NYSE: L) is considered a diversified holding company, with a high concentration in the insurance and oil/gas industry. After recently releasing its 13F filing, I decided to check up on Loews top three holdings. Loews key subsidiaries includes CNA Financial (NYSE:CNA)Boardwalk Pipeline Partners (NYSE: BWP) and Diamond Offshore Drilling (NYSE:DO)

Loews' segments

  • CNA Financial is a property-casualty insurer in the U.S., providing standard commercial lines, specialty lines, surety, marine and other property and casualty coverage, as well as life and group insurance coverage. Loews owns nearly 90% of the company and it contributes some 65% of revenue.
  • Diamond Offshore owns and operates 49 offshore-drilling rigs on a contractual basis for oil and gas exploration and production companies. Loews currently owns a 50% stake in Diamond, which accounts for 21% of its revenue.
  • Boardwalk Pipeline Partners is 40.5% owned by Loews. Boardwalk is engaged in the operation of interstate natural-gas pipeline systems. Loews derived 8% of its 2012 revenue from Boardwalk.
  • HighMount Exploration & Production is engaged in natural gas and oil exploration and production operations located in the Permian Basin in Texas, the Antrim Shale in Michigan and the Black Warrior Basin in Alabama. The oil/gas company contributes 2% to revenue.
  • Loews Hotels, a wholly owned subsidiary that owns and operates 18 hotels in the U.S. and Canada, generated 2.7% of full-year 2012 revenue. 

Loews hopes to strengthen its hotel segment by adding more hotels to its portfolio in order to take the count from 18 to more than 30 in the next three-to-five years. Part of this includes an agreement with CIM Group to purchase Renaissance Hotel & Spa in Hollywood, Calif. Loews Hotels also recently bought Madison Hotel in Washington, D.C. from Jamestown Properties.

Lowes' subsidiaries

CNA Financial is the 14th-largest U.S. property and casualty company based on written premiums. From a valuation perspective, CNA trades a 0.7 times book value versus an industry average of 1.0. Its property and casualty rates are showing signs of improvement and CNA also boasts $1.5 billion in cash, compared to debt of approximately $2.6 billion. 

Boardwalk Pipeline Partners is a master limited partnership engaged through its subsidiaries, Texas Gas Transmission and Gulf South Pipeline. Recent news for Boardwalk involves its foray into the natural-gas liquids business, thanks to a joint venture with Boardwalk Pipeline.

Natural gas appears to be an attractive energy choice given its relative fuel efficiency, low emissions, quick construction timelines and low capital costs. Boardwalk also acquired Boardwalk Louisiana Midstream and is expanding in the Southeast market and in the Eagle Ford, which is expected to bring $1.2 billion of new assets to Boardwalk. 

The outlook for oil and gas storage and transportation is positive, with fee-based pipeline and terminal operators expected to expand thanks to U.S. GDP growth in 2013. S&P projects GDP growth of 2.7% for 2013 and 3.1% for 2014 versus the 2.2% growth in 2012. Boardwalk also trades relatively cheaply at 1.8 times book value compared to the industry average of 2.1.

Diamond Offshore Drilling has a focus on deepwater drilling, with 44 mobile offshore drilling rigs: 37 floaters (including 12 ultra-deepwater units, seven deepwater units and 18 mid-water capable floaters), and seven jackup rigs. These rig counts include four new ultra-deepwater floaters under construction, as well as two deepwater floaters under construction, with all six units due for delivery in 2013 to 2014.

As well, its rigs are located in a number of offshore basins around the world, including the Gulf of Mexico, the North Sea, South America, Africa, Australia and Southeast Asia. Another encouraging factor is that Diamond has heavy international diversification, with 94% of 2012 revenue being derived from outside the U.S. The big initiative for Diamond is to increase its footprint in emerging markets, namely Brazil, Australia and West Africa. 

Hedge fund thoughts

At the end of 2012, there were a total of 24 hedge funds long Loews, a 20% increase from the third quarter. This includes the company's top hedge fund owner by market value, Southeastern Asset Management, with a position close to $1.5 billion and making up 6.7% of its total 13F portfolio (check out Southeastern's favorite stocks).

CNA had 14 hedgies long the stock going into 2013, which was an 8% increase from the third quarter. Its top hedge fund owner was Pine River Capital, holding a $19 million position in the stock, comprising 0.4% of its 13F portfolio (see Pine River's high yielders).

Meanwhile, Diamond had some of the lowest interest, with 13 hedge funds long the stock, a 19% decrease from the third quarter. However, the top hedge fund owner was billionaire Jim Simons' Renaissance Technologies, with a $103.8 million position in the stock (check out Simons' tech picks).

Don't be fooled

All four companies (Loews and its three subsidiaries  have seen their stocks perform relatively inline with each other over the past 12 months.

The bottom line is whether there is any value-added by investing in Loews, or should investors simply invest in CNA, Diamond and Boardwalk on their own?  

Based on the shares owned at the end of 2012, Loews currently owns approximately 89.9% of CNA, 50.4% of Diamond and 40.5% Boardwalk. Based on current market caps of these companies, Loews has a $16.5 billion ownership across the three companies compared to its own market cap of $17.8 billion. Thus, investors are getting the oil/gas exploration (HighMount) and hotel (Lowes Hotels) for a mere 1.9 times revenue. 

Also, that's assuming that the three publicly traded companies, CNA, Diamond and Boardwalk, are fairly valued. Thus, I think investors should see nice returns over the long term by investing in Loews given its exposure to the relatively stable insurance industry and exposure to the fast-growing natural-gas industry, not to mention its hotel business.