According to a filing with the SEC, a member of the Board of Directors at Loews Corporation (NYSE:L) purchased 5,000 shares of the company’s stock on November 29th at an average price of $40.99 per share. Ken Miller now owns 17,000 shares of Loews, so this recent buy of about $200,000 was an increase of over 40% in his holdings. Loews has a number of business interests: a casualty and property insurance company, substantial energy holdings (including offshore drilling rigs, exploration and production operations in Texas, and natural gas pipelines), and a number of hotels in North America. On average, insider purchases are bullish signs for a stock as they indicate that the insider is so confident in the company’s prospects that they are willing to forgo the benefits of diversification. However, our database of insider filings shows that there has been significant insider sales activity at Loews in November; while insider sales can often be rational as insiders look to diversify, it’s something to note.
In the third quarter of 2012, Loews Corporation experienced an 8% increase in revenue compared to the same period in 2011, but this was driven mostly by investment income and gains. Insurance premiums were up, but were offset entirely by a fall in contract drilling revenue. With operating expenses generally up, earnings rose 9% (reversing the trend of lower net income that had occurred in the first half of the year). In terms of net income, the insurance business seems to bring in about twice as much money as the contract drilling operations, which in turn make 3-4 times as much profits as pipelines. Oil and gas exploration and production was unprofitable generally due to a special charge, while the hotels business has been roughly breaking even. Loews currently trades at 19 times trailing earnings, suggesting that investors foresee similar future growth rates to what the company recorded last quarter, but only 11 times forward earnings estimates as analysts expect a much better bottom line next year.
Renaissance Technologies, whose success since inception has made founder Jim Simons a billionaire, initiated a position of about 700,000 shares in Loews Corporation during the third quarter (check out more of Renaissance Technologies’ stock picks). Billionaire Mason Hawkins’ mutual fund Southeastern Asset Management had Loews as the second largest position by market value in its 13F portfolio, with its 38 million shares being worth $1.6 billion at that time (find more stocks that Southeastern has over $1 billion invested in).
Two leading property and casualty insurance companies are American International Group, Inc. (NYSE:AIG) and The Travelers Companies, Inc. (NYSE:TRV). AIG’s value status- it’s currently valued at 10 times consensus earnings for 2013, and a P/B ratio of 0.5- helped make it one of the most popular stocks among hedge funds for the third quarter (see the full rankings). We think it’s a buy, but note that its forward P/E is about even with where Loews is (Loews also trades at a discount to the book value of its equity, but given its other business interests it’s tougher to make a comparison there). Travelers has a forward P/E multiple of 11, and that figure is based on high growth expectations even though earnings were actually down slightly in the third quarter from a year earlier. Both of these companies are larger than Loews in terms of market cap, and as a less diversified company Loews would likely warrant a lower multiple if its other operations were similarly priced.
As a result we’d look at contract offshore driller Transocean LTD (NYSE:RIG) and pipeline company Kinder Morgan Inc (NYSE:KMI). Again, these companies are pure plays, and are market leaders in their industries, so we’d expect them to trade at a premium to Loews. Transocean trades at 10 times forward earnings estimates, while Kinder Morgan carries a forward P/E of 25. Of course, pipelines are a much smaller source of business for Loews than either insurance or drilling.
We’d conclude that an investor would probably do better by investing in a combination of these market-leading stocks, weighted to reflect the various sizes of Loews’ businesses, rather than buying the stock. Of course that approach could also allow an investor to avoid, say, the pipeline business entirely. Loews should be trading at a discount relative to a mix of larger, more focused companies in similar industries and we’d also consider the insider purchase in the context of heavy insider selling.