Loews 4Q16 Earnings Call Notes

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James S. Tisch

There is a disconnect between markets and the current landscape and that concerns me

” I’ve been around long enough to have lived through all sorts of markets. I’ve learned to respect markets, while at the same time being skeptical of conventional wisdom. I’ve lived through a bond bare market and a gargantuan bond bull market. I’ve seen bond yields above 15% and below 2%. I’ve seen inflationary spirals, I’ve seen deflationary threats, I’ve seen deregulation and reregulation. I’ve seen the S&P 500 trade as high as 30 times earnings and I’ve seen the S&P trade as low as 7 times earnings. With all this experience, that comes with age I might add, here is what I’m seeing in the markets today. In the credit markets, spreads on the high yield securities are approaching historically tight levels, while key credit metrics such as leverage and coverage ratios are showing signs of weakening. The leverage loan market has been overrun by such massive inflows of capital that you could probably get alone to buy a fleet of zeppelins at this point in time. With respect to rates, the 10-year treasury note is currently trading at around 2.5%, up from its recent lows, but still well below historic norms. In my view, the mood of these markets is in stark contrast with the many unknown from our current economic and political landscape, both here and abroad. For me, it’s a major disconnect, and it concerns me.”

Valuations make me uncomfortable

“The optimism in the rates and credit markets is likewise reflected in the public equity and merger markets. The S&P 500 is trading at roughly 19 times earnings, 3 turns higher than the 50-year average of 2016. These valuations make me uncomfortable, especially given the unknowns in taxation, foreign trade, regulation and more.”

Markets are priced for perfection but they wont stay that way indefinitely

“To sum up, in my opinion, the markets are priced for perfection, and they have been that way for quite some time, complacency reign supreme. However, my experience has shown me that this state of affairs won’t go on indefinitely. So why am I sharing these thoughts with you? Because I know that some of you have wondered why we brought back relatively few Loews shares in 2016 or why Loews hasn’t made an acquisition.”

Foot is getting sore from kicking so many tires

“As for the second question about adding another leg to the stool, we continue to kick tires looking for the right company at the right price. One of our shareholders recently asked, if my foot is getting sore and I have to admit it is. Valuations in the merger markets have made our acquisition search difficult and frustrating. We always try to invest only when all the pieces of a transaction from valuation to potential cash flow to future industry dynamics add up to a solid idea. And while I won’t comment in detail, last year, we did get pretty far down the road towards making an acquisition. In the end, however, the pieces did not all fit together the way we’d hoped they would.”

It’s a tough market in which to be a disciplined buyer

“It’s a tough market in which to be a disciplined buyer. I assure you that we remain committed to our longstanding philosophy of creating value for all shareholders through prudent capital allocation. Sometimes we accomplish this through share repurchases, sometimes by acquiring a new business, sometimes through an investment in one of our existing subsidiaries, or sometimes we choose to take the action of taking no action.”

It’s too early to tell on Trump

“I think it’s too early to tell. Well, we’ve seen from some of his statements and some of the executive orders is a push towards reducing cumbersome rules and regulations. And I think that is positive. But what we’re really going to have to wait to see is what happens with the major economic legislation that comes before Congress. There’s only so much that a President can do and then there’s a lot that Congress can do. So we’ve got to wait and see what happens to fiscal spending. We’ve got to wait and see what happens to taxation. We’ve got to wait and see what happens to healthcare and a whole bunch of other legislation. So I would say that I am hopeful, but I think also it’s too early to tell.”