As it is often the case at the time of crisis, the market is focusing on near-term challenges and is not considering how situation could change in 2-3 years. Loews is not widely covered and lacks attributes of a 'hot story' to make it a popular stock on Wall Street. Hence, the price could be significantly lower than what the company is really worth. I review key 'misconceptions' below and explain why I have a different view than the market.
- Market is focusing on short-term uncertainty (time arbitrage). While the final impact of COVID-19 pandemic on the global economy remains unclear, I think the situation would normalise in the medium-term. It may take 6 months or 2-3 years, but it is unlikely that the world has changed for ever and values of Loews's core businesses have been permanently impaired.
- Possible losses of the insurance business. I do not know for sure the extend of increased payouts by CNA Financial related to COVID-19. However, with a separate listing, it is likely that CNA Financial's stock already reflects those losses at least partially. If that is the case, then it is also likely that Loews' share price discounts some of those losses too. In other words, even if such losses were to happen, the actual price will probably not change much.
The $3.5bn cash position of Loews should also be an important factor for providing necessary support for CNA in case of bigger problems.
Importantly, during 1Q20 conference call the CEO of CNA Financial, Dino Robusto stated that "CNA's property policies required direct physical damage to the property from a covered peril for coverage to attach. Additionally, the property policies, whether issued in the United States or internationally, have exclusions borrowing coverage for viruses. There are very few policies where coverage may exist on small participations in our operations, but the total limits exposed are de minimis. So, with respect to property business interruption insurance, CNA's policy language does not cover COVID-19 in virtually all cases, and the company never collected premiums for it".
At the same call, the management also noted that it expects its actions to tighten various terms and conditions within professional liability business to mitigate company's exposure to COVID-19. CNA has received relatively few notices from its ageing services insured, according to the CEO.
Finally, similar to other insurance companies, CNA underscores that industry conditions were improving with price increases accelerating to about 8%.
- Impact of COVID-19 on other businesses is much less severe. The market may be concerned that Loews' pipeline business may suffer as oil & gas production plunged and with lower prices customers will not be able to meet their obligations. Addressing this point, Loews' CEO noted during 1Q20 call that "almost 90% of Boardwalk's revenues are backed by fixed fee take-or-pay agreements. Revenue in 2020 is expected to be about $60 million lower in 2019, due primarily to the expiration of the legacy contracts. At the end of 2020, Boardwalk should have a debt to EBITDA ratio below 5 times leverage… the company expects to finance its capital needs this year primarily by using internally generated cash flow".
As for the packaging operations, Loews expects EBITDA of that business "to be up nicely in 2020 with a good portion coming from completed acquisitions, as well as from organic growth".
- Exposure to hospitality business. Hotel segment suffered the most with only 4 out of 28 hotels remaining open (with much lower utilisation, obviously). Loews estimates that the business would be burning c. $25bn of cashflow every month with its hotels shut. So assuming they remain shut for a year, Loews Hotel would lose $300mn of cashflows –not critical for a business with $3.5bn of cash position.
- Loews is not covered by investment banks. As strange as it may sound for a $10bn market cap company with US listing, I could not find a single investment bank that covered the company's stock. There are only two small independent firms that claim that they cover the company. For traditional asset managers, Loews does not offer a particularly compelling theme of 'digitalisation', 'decarbonisation' or other hot topics which makes it less attractive to own. Losing money in Tesla or Amazon is perhaps less punishing than in a obscure, poorly covered holding company from a career perspective.