Loews Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Loews Corporation is a diversified holding company with operations in commercial insurance (CNA), energy through Diamond Offshore Drilling and Boardwalk Pipelines, and a chain of hotels (Loews Hotels).

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Loews operates across diverse sectors, with no single segment dominating its revenue generation, making it a conglomerate.

Business Explanation

Loews Corporation (L) operates in four primary segments:

  1. CNA Financial: This segment offers commercial insurance products such as property and casualty insurance, including professional liability, and group insurance.
  2. Boardwalk Pipelines: This segment operates natural gas pipeline and storage systems primarily in the United States.
  3. Loews Hotels & Co: Owns and operates hotels mostly in the US.
  4. Altium Packaging LLC: Manufactures and distributes rigid plastic, glass and metal containers in North America.

This diversification, spanning insurance, energy, hospitality, and packaging, could mean that even if a recession hits, the different industries may have varying results that could balance each other.

Competitive Landscape

  • CNA Financial: Operates in a very competitive insurance market which is highly regulated, where pricing is largely determined by the level of claims and the regulatory climate. Also has exposure to significant losses from natural disasters. Companies compete based on their pricing and the quality of the product as well as customer service.

CNA is showing some improvement in its combined ratios for September 2023, but the ratio is still above the target level of 100. This implies that it still has high costs. Also, while premiums are rising, the increase in insurance rates has started to slow down, and so the pricing power isn’t completely in their favour.

  • Boardwalk Pipelines: It operates within a heavily regulated segment. There’s intense competition from similar pipelines and alternative methods of transportation as well as potential political obstacles for new or expanding pipelines.

Boardwalk Pipelines are facing regulatory pressures related to environmental and operational issues. But there is growth from increased rates, and natural gas transportation has become more important than ever after 2022, which has resulted in growth. However, growth may still be subject to regulatory hurdles and high interest rates.

  • Loews Hotels & Co: Operates in the highly fragmented and competitive hospitality industry. Competition is primarily based on location, brand, price and the quality of facilities and services offered.

Loews Hotels is doing well, and their revenue is above pre-COVID, which shows the demand and their brands are doing very well. But operating margins are similar to the pre-COVID levels, which could be an indication that the hotel sector isn’t very profitable.

  • Altium Packaging LLC: Operates in a commoditized industry that includes both large and small manufacturers and distributors. The supply for raw materials are mainly from oil companies. The company is very dependent on raw materials, that are usually commodities with little to no brand name differentiation. As such, competition is typically based on prices.

The company is very diverse and so it does not have a specific segment that is responsible for a larger share of revenues and their profitability.

Financial Overview

  • Revenue Distribution: In 2022, CNA contributed the most, with 53% of the total revenues, followed by Boardwalk Pipelines with 28%, Loews Hotels with 15% and Altium Packaging with 4%.

For the first nine months of 2023, CNA continues to contribute the most to revenue at 64%. Boardwalk pipelines have increased to 24%, whereas Loews Hotels and Altium Packaging’s shares of total revenue have decreased to 8% and 3% respectively. This implies a decrease in the hotel and packaging sector revenues.

  • Profitability: Operating profit and profit margins vary considerably between different business segments, and all different segments were highly impacted by the crisis in 2020. All segments saw profits rebound in 2021 and 2022.

For the first nine months of 2023, all segments except corporate and other had a positive operating profit. However, growth has slowed down and the earnings for CNA have dropped in Q3 2023. Boardwalk pipeline profits have gone up and so has the interest income. Loews Hotels profits remained stagnant.

  • Long-Term Debt: Total long-term debt of Loews Corporation was $4,829 million in December 2022, and is slightly decreased from $5,028 million in the previous year. The net debt of the company has increased compared to pre-COVID levels as they have acquired more companies in the energy industry.

As of September 2023, the long-term debt slightly decreased to $4,386 million. But the short-term debt and borrowings remained about the same with slight increases as well.

  • Cash Position: The company has had sufficient amount of liquidity through cash, and short-term investments.

As of September 2023, they have a cash balance of $1,381 million, and a total of $1,702 million in cash equivalents.

  • Return on Capital: Return on invested capital (ROIC) is an important measure, and should be analyzed by each of the operating segments that the company operates in. In recent years, the company as a whole have maintained a low to moderate return on capital.

As of 2023, the company is targeting on improving its return on invested capital by growing its profits and also by taking a more conservative view on capital expenditure.

Moat Analysis: 2 / 5

While Loews Corporation operates across diverse sectors, its “moat”—the sustainable competitive advantages that protect it from competitors—is not particularly strong or well-defined.

  • Network Effect: None of its business operations benefit from a network effect.
  • Intangible Assets: Loews Hotels and the company’s insurance brands have some degree of branding, but not enough to confer a significant sustainable competitive advantage. Brands in the hospitality and insurance sectors are easily replicable. As such, they do not have significant pricing power.
  • Switching Costs: The company’s operations do not possess switching costs that significantly impede customers from changing suppliers or service providers.
  • Cost Advantages: There is evidence that some of its segments operate at a cost advantage, including lower cost procurement, better production efficiency. However, those are not very well documented to determine their strength or persistence. They mainly focus on the economies of scale, which are easy to replicate.
  • Scale: Some of their segments benefit from scale such as Boardwalk pipelines, as it is the largest provider of natural gas transportation in the US. However, its scale advantage is often limited by geographical regions. As such, they have a narrow scope moat instead of a large scope moat.

The lack of a wide moat means that Loews Corporation is vulnerable to competition and may not be able to generate excess returns on capital for extended periods.

Risk and Resilience

  • Industry Cyclicality: Most of its major segments, especially energy, hospitality and insurance tend to be cyclical, and so their profitability is dependent on the overall economic cycle, which can drastically affect their revenue in times of economic uncertainty.
  • Regulatory Risks: All its segments face regulatory risks, and this will affect its operations in an adverse manner.
  • Competition: Intense competition in the sectors they operate will force them to compete for market share or clients, thus reducing profits and margins.
  • Uncertain Macroeconomic Conditions: Macroeconomic changes can lead to unforeseen market changes, as such a recession can cause a large decrease in business value as well as the financial condition and the company may have higher leverage than what it would be comfortable with.
  • Technological Disruption: All of its sectors are susceptible to technological changes which will make their present business models obsolete. For example, with the rise of electric cars, fewer customers are expected to get into the fuel production business which will cause lower revenues for the pipeline business.
  • Integration Risks: The company is actively acquiring new companies, as such they are exposed to the risk that they may overpay for these companies and that they may not be able to bring the target company under the same standards and rules of the company. This will hurt their balance sheet and operational efficiencies.

The diversified nature of Loews Corporation gives some degree of resilience, but in times of economic downturn they are still expected to have negative results and the management must be proactive and make sure to mitigate against these risks.

Understandability Rating: 3 / 5

While the basic business models of each segment are relatively straightforward, the overall structure of Loews as a conglomerate makes it more complicated. The company operates across diverse segments with varying operations, and so understanding the value drivers across all these is difficult. The lack of detailed financials for each sector further decreases the level of understandability for this company. Investors must do extra effort to dig down into each sector to understand the company completely.

Balance Sheet Health: 4 / 5

The company has a moderate amount of long-term debt. They have a good amount of liquidity, with good amount of cash available. But they don’t report much on how much cash comes directly from operations, this could mean that it has a harder time controlling and predicting future cash flow. Overall, their balance sheet is strong, but there is a need to make more disclosures about their cash flows and a plan on how to pay off debts in the near future.

Recent Concerns and Controversies

  • CNA Losses: CNA’s net loss for the third quarter of 2023 caused a great concern among investors, and as such the stock has performed poorly. Management has tried to calm the fears by reiterating that this loss is an anomaly and it will not continue for a long time.
  • Boardwalk Pipeline Concerns: Boardwalk Pipeline has faced some regulatory hurdles as well as some negative news coming out related to pipelines, and as such investors are wary of further developments in the company. Management have tried to assure investors that the company will still be able to manage the effects of these factors.