Leucadia's (LUK) Long-Term Prospects Bright, Risks Remain

On Jun 13, we issued an updated research report on diversified holding company, Leucadia National Corporation (NYSE:LUK) .

Leucadia has diversified business operations that mitigate operating risks. The company’s businesses have separate revenue streams that move according to their own cycles. Consequently, the company remains relatively immune to the vagaries of a particular business at any given point of time. Ownership of a variety of strong cash-producing businesses helps Leucadia generate market-beating returns. The company also leverages the strength of Jefferies to find great investment banking opportunities to acquire more cash-cow businesses.

A pro-growth business environment with a lower corporate tax structure should bode well for the economy and financial markets in general and for Jefferies. In addition, President Trump’s plan to spend $1 trillion in infrastructure projects over a period of 10 years and regulatory rollbacks for boosting the profitability of small and medium sized companies augurs well for Leucadia. The company has outperformed the Zacks categorized Diversified Operations industry with an average year-to-date return of 9.2% compared with a paltry gain of 3.3% for the latter.

Leucadia's businesses have more or less stabilized after a torrid 2015 and are favorably positioned for the future. Companies like National Beef had a difficult period in the past years as the cattle industry went downhill, but the fundamentals seem to be improving. We can see this in the profit margins of National Beef, which recently improved as the demand for beef picked up while raw material prices declined. Solid traction is also envisioned within its Leucadia Asset Management platform.

However, Leucadia has a significant exposure to the European market. In the present scenario, when the economy in the region is highly unpredictable particularly after the Brexit referendum, it becomes difficult for the company to increase revenues and reduce costs. Brexit could further result in higher tariff and non-tariff barriers to trade between the U.K. and the European Union, lowering the productivity of the company.

In addition, Leucadia has to continually maintain and upgrade its computer systems and networks to prevent any intrusion and data theft of confidential and sensitive client information in Jefferies. At the same time, the company has to employ risk monitoring techniques such as scenario analysis and stress tests, exposure concentrations, counterparty exposure, leverage, cash capital, and performance analysis for Jefferies and Leucadia Asset Management. All these consume a significant amount of its resources and strain its profitability.

Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the industry include 3M Company (NYSE:MMM) , Bunzl (LON:BNZL) plc (OTC:BZLFY) and Federal Signal Corporation (NYSE:FSS) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

3M has a long-term earnings growth expectation of 9.7%. It surpassed estimates thrice in the trailing four quarters with an average positive earnings surprise of 1.3%.

Bunzl has a long-term earnings growth expectation of 3.2%.

Federal Signal surpassed estimates twice in the trailing four quarters with an average positive earnings surprise of 3.1%

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