(L-NYSE) SUMMARY. Risk Level *

Transcription

1 February 10, 2015 Loews Corporation Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 09/04/2014 Current Price (02/09/15) $41.23 Target Price $ Week High $ Week Low $38.26 One-Year Return (%) Beta 1.04 Average Daily Volume (sh) 1,330,168 Shares Outstanding (mil) 374 Market Capitalization ($mil) $15,420 Short Interest Ratio (days) 2.15 Institutional Ownership (%) 59 Insider Ownership (%) 10 (L-NYSE) SUMMARY Loews earnings in the fourth quarter surpassed the Zacks Consensus Estimate but lagged year over year on lower investment income. Top line declined year over year on lower insurance premiums, investment income and contract drilling revenues. On the other hand, expenses decreased on lower insurance claims & policyholders' benefits as well as contract drilling expenses. Loews remains on track to strengthen its hotel business by doubling its hotel count within the next two to four years and expects to triple its net income by Though Diamond Offshore continues to improve its fleet, a weakening ultra-deep-water and deep-water market will dampen results. It also witnessed lower rig utilization in the quarter. Boardwalk remains on track to expand the existing pipeline infrastructure as market condition improves. The acquisitions of HP Storage and Louisiana Midstream support its strategy to focus on diversification, to become less dependent on its base gas transportation business. A strong balance sheet with low leverage and adequate cash along with strong rating scores are among the positives. Risk Level * Low, Type of Stock Large-Value Industry Ins-Multi Line Zacks Industry Rank * 101 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) Annual Cash Dividend $0.25 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 0.6 Earnings Per Share (%) -3.7 Dividend (%) 0.0 using TTM EPS 16.4 using 2015 Estimate 13.1 using 2016 Estimate ,734 A 3,725 A 3,704 A 3,890 A 15,053 A ,743 A 3,593 A 3,523 A 3,521 A 14,325 A ,383 E ,848 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.81 A $0.71 A $0.83 A $0.92 A $3.28 A 2014 $0.68 A $0.79 A $0.47 A $0.57 A $2.52 A 2015 $0.74 E $0.79 E $0.81 E $0.81 E $3.15 E 2016 $3.51 E Zacks Rank *: Short Term 1 3 months outlook 4 - Sell Projected EPS Growth - Next 5 Years % * Definition / Disclosure on last page 2015 Zacks Investment Research, All Rights reserved North Canal Street, Chicago IL N/A

2 RECENT NEWS Loews Q4 Earnings Beat, Falls Y/Y on Low Investment Income Feb 9, 2015 Loews Corporation reported fourth-quarter 2014 operating earnings of $0.57 per share, surpassing the Zacks Consensus Estimate by about 7.5%. Earnings, however, lagged about 11% year over year on lower investment income. Including loss from discontinued operations (sale of HighMount Exploration & Production, LLC and CNA Financial Corp's annuity and pension deposit business), net income came in at $0.55 per share, rebounding from the year-ago loss of $0.51 per share. For full-year 2014, operating income of $2.52 per share missed the Zacks Consensus Estimate by a couple of cents and declined 15% year over year. Net income of $1.55 per share improved 1% from the year-ago earnings. Revenues Loews total revenue declined 6.7% year over year to $3.5 billion in the quarter. Lower insurance premiums, a decline in investment income as well as decreased contract drilling revenues induced the downside. Revenues for 2014 slid 2% year over year to $14.3 billion. Behind the Headlines Total expenses decreased 5.3% year over year to $3.2 billion on lower insurance claims & policyholders' benefits as well as contract drilling expenses. CNA Financial s revenues declined 6.7% over the prior-year period to $2.4 billion. It reported net income attributable to Loews Corp. of $186 million, down 0.5% year over year. The decline came from lower net investment income and charges related to pension plan settlement. However, a benign catastrophe environment, improved current accident year underwriting results and favorable net prior year development came as respites. Boardwalk Pipeline Partners, LP s revenues decreased 1.9% to $305 million from the prior-year level. Its reported net income attributable to Loews Corp. improved nearly threefold to $11 million. Loews Hotels revenues improved about 47% year over year to $132 million. Earnings of $3 million rebounded from the year-ago loss of $5 million on higher equity earnings from joint venture properties. Diamond Offshore Drilling s revenues declined 7% year over year to $677 million. Earnings improved 6.8% year over year to $47 million in the quarter. Earnings benefitted from an absence of tax provision. The segment still witnesses lower rig utilization. Book value as of Dec 31, 2014 was $50.95 per share, up about 3.2% from $49.38 as of Dec 31, Share Repurchase During the fourth quarter of 2014, Loews spent $207 million on buying back 5 million shares taking the full-year tally to 14.6 million shares repurchased for $622 million. Equity Research L Page 2

3 VALUATION Shares of Loews Corp. currently trade at 13.1x our 2015 earnings estimate, a 12.9% premium to the industry average of 11.6x. On a price-to-book basis, the shares trade at 0.6x, 50.1% discount from the industry average of 1.1x. The valuation on a price-to-book basis looks reasonable, given that the trailing 12-month ROE is 49.4% below the industry average. Our six-month target price of $43.00 per share equates to about 13.7x our 2015 earnings estimate. This price target along with the annual dividend of $0.25 per share implies an expected total return of 4.6% over that period, which is consistent with our Neutral recommendation. Additionally, the quantitative Zacks Rank for Loews is currently 4, indicating downward directional pressure on the shares over the near term. Short interest is currently 2.2 days. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Loews Corp. (L) NA Industry Average S&P AGEAS-ADR (AGESY) 10.8 NA Hartford Financial Services Group Inc. (HIG) SCOR SE (SCRYY) NA NA NA Assurant Inc (AIZ) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Loews Corp. (L) Industry Average S&P Equity Research L Page 3

4 Earnings Surprise and Estimate Revision History NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET. Equity Research L Page 4

5 OVERVIEW Based in New York, Loews Corporation (L) is a diversified holding company. Loews principal subsidiaries are: CNA Financial Corporation (CNA), which is the 14 th largest property-casualty insurer in the U.S., provides standard commercial lines, specialty lines (specialty property-casualty, professional and financial), surety, marine and other property and casualty coverage as well as life and group insurance coverage. 90.0% of CNA is owned by Loews. This insurance provider contributed 67% of Loews full-year 2013 revenues. Diamond Offshore Drilling Inc. (DO), which owns and operates 49 offshore drilling rigs on a contractual basis for oil and gas exploration and production companies. Loews currently owns a 50.4% stake in DO, which accounted for 19% of full-year 2013 revenues. Boardwalk Pipeline Partners LP (BWP), approximately 66.0% is owned by Loews. Through its subsidiaries, Boardwalk Pipeline is engaged in the operation of interstate natural gas pipeline systems. The company derived 8% of full-year 2013 revenues. Boardwalk Pipeline conducts all of its operations through its three operating subsidiaries Gulf Crossing Pipeline Company LLC, Gulf South Pipeline Company LP and Texas Gas Transmission LLC. HighMount Exploration & Production LLC, also a wholly owned subsidiary, engaged in natural gas and oil exploration and production operations located in the Permian Basin in Texas, the Antrim Shale in Mich. and the Black Warrior Basin in Ala. In Apr 2010, HighMount sold its exploration and production assets located in the Antrim Shale in Mich. and entered into a definitive agreement with another purchaser to sell its exploration and production assets located in the Black Warrior Basin in Ala. This operation contributed 2% of full-year 2013 revenues. Loews Hotels Holding Corporation, a wholly owned subsidiary that owns and operates 19 hotels in U.S. and Canada, generated 3% of full-year 2013 revenues. REASONS TO BUY Loews aims to strengthen its hotel business, its smallest unit, with the addition of more hotels to its portfolio to take the count to over 30 in the next two to four years, and triple its net income by Loews Hotels currently operates a chain of 21 hotels (20 in the United States and 2 in Canada). Washington is the foremost U.S. city for international visitors and ranks among the first 20 on a domestic basis. Possessing a property at such a prime location is expected to assist Loews in achieving its goal. As such, in 2012, Loews Hotels had added properties in Boston, Washington and Los Angeles. In 2013, it worked on The Loews Chicago Hotel scheduled to open in Jan Additionally, it closed the purchase of Back Bay Hotel in Feb In 2014, it added four more properties to its portfolio Cabana Bay Beach Resort in March, Loews Chicago O Hare Hotel scheduled to open in early 2015, Loews Minneapolis Hotel and Loews Ventana Canyon in Arizona. With capital at its disposal to acquire and develop property, the company will seek similar opportunities in Boston, Chicago, San Francisco, Washington, D.C., New York City, Dallas, Toronto and Seattle to add assets to its portfolio and cater to a larger customer base. At the end of second-quarter 2010, Loews insurance company CNA Financial had announced an agreement to transfer its legacy asbestos and pollution liabilities to National Indemnity, a subsidiary of Berkshire Hathaway. This transaction will effectively eliminate CNA's asbestos and pollution reserve risk, as well as any reinsured dispute and credit risk, thereby reducing earnings volatility. The company also sold a 50% stake in First Insurance Company of Hawaii during the fourth quarter Equity Research L Page 5

6 of It also closed the divestiture of the majority of its run-off annuity and pension deposit business with the sale of an equity stake in Continental Assurance Company in Aug CNA Financial has retained its momentum of delivering solid underwriting margins besides delivering the highest income since Though operating income declined in the third quarter, both CNA Specialty and CNA Commercial improved their underlying loss and combined ratios. CNA s property and casualty operation continues to deliver solid performances. CNA Specialty as well as Commercial continues to experience rate increase as well as solid retentions. CNA s Hardy Underwriting acquisition for $227 million boosts the company s international operations. Boardwalk Pipeline formed a joint venture with Boardwalk Pipeline Partners LP, to foray into the natural gas liquids business. Natural gas is usually an attractive choice because of its relative fuel efficiency, low emissions, quick construction timelines and low capital costs and will gradually become a major source of power generation. The acquisition of Boardwalk Louisiana Midstream (PL Midstream acquired through the joint venture was renamed Boardwalk Louisiana Midstream) along with the organic growth projects (the Southeast market expansion and the Eagle Ford expansion projects) are expected to put up $1.2 billion of new assets for Boardwalk. The company bought back 80% stake in Boardwalk HP Storage for $225 million that Loews had purchased to support Boardwalk's purchase of those storage assets in December In Mar 2013, it announced the Bluegrass Pipeline project in partnership with the Williams Company. Further in May, Boardwalk entered into a joint venture with Williams to continue the development process for the proposed Bluegrass Pipeline. Riding on the strength of strong liquidity, Loews engages in regular buybacks as it sees this as one of the main drivers of shareholders value. In the third quarter, the company repurchased 5.1 million shares with another 4 million shares bought in the fourth quarter. The company has spent $581 million year to date to buy back 13.6 million shares. The company has also noted that share repurchases have greatly contributed to the significant long-term outperformance of the stock versus the S&P 500. REASONS TO SELL Diamond Offshore continues to post lower earnings. The third quarter suffered from lower rig utilization and an impairment loss related to the carrying value of six semisubmersible rigs. Revenues from deepwater and mid-water floaters and jack-up rigs remained low. Diamond Offshore noted softening market conditions for ultra-deepwater. Oversupply of floaters due to newbuild rig deliveries and established rigs coming off contract are leading to lower contracted dayrates, shorter-term contracts and idling of rigs. The market conditions for deepwater are soft. The market condition for ultra-deepwater and deepwater floaters are expected to remain depressed due to influx of newbuilds into the market, combined with established rigs coming off contract in 2014 and On the positive note, Diamond Offshore inked a contract with Hess Corporation for the last two of Diamond s new build drill ships the Ocean Black Rhino and the Ocean Black Lion. The contract is estimated to generate combined total revenue of about $1 billion and represent seven years of contract drilling backlog. After several quarters of solid underwriting results, earnings started to face pressure as cost and market overhangs were experienced within the broader industry (based on concerns for the housing markets and the associated loans, repackaged into securities that have taken hold). The current economic and competitive market conditions have led to decreased insured exposures and lower rates, such as in the construction industry, due to smaller payrolls and reduced project volume. These conditions continue to pressurize premium, income levels and the expense ratio. Until these issues are successfully managed, we see few catalysts for significant upside potential in the near term. Equity Research L Page 6

7 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of L. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121 companies covered: Outperform %, Neutral %, Underperform 7.1%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research L Page 7