With such a large holding of gvt bonds and interest sensitive investments I wouldn't be suprised if we see like back in the 20-22 dollar range, where it should be. No way LUK can post a profit take a loss on the gvt bonds
"I wouldn't be suprised if we see like back in the 20-22 dollar range, where it should be." - DTM
What is your rationale for this statement?
Athough LUK is one of my top 3 holdings, I personally would be thrilled if it returned to the $20-22 range for two reasons.
1. It would provide insight as to whether or not ~$20 per LUK share still represents an near / intermediate term price floor (barring some exogenous shock) post JEF merger.
2. I would be able to buy more shares for the long term in my favorite price range, with very strong conviction.
Do you have any additional insights or detailed numbers regarding the potential magnitude of unrealized losses from LUK's fixed income investments? Particularly as it relates to any and all of JEF's bond holdings and potential hedges. I am not too concerned about LUK's legacy fixed income portfolio because as others have pointed out, the majority of these bonds are classified as "current assets" and will mature later this year.
Here is their non-current investment portfolio break down
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Bonds and notes:
U.S. Government and agencies $ 6,449 $ 41 $ – $ 6,490
U.S. Government-Sponsored Enterprises 578,922 16,488 482 594,928
All other corporates 154,245 778 885 154,138
Total fixed maturities 739,616 17,307 1,367 755,556
yahoo posted my comment without giving me a chance to clean it up first. But im sure you can find the information outlined above in a much cleaner format in the 10-k.
of the ~$755,000,000 total estimated fair value at end of 2012, approximately $747,000,000 is comprised of mortgage backed / asset backed securities.
Doubleline CIO Jeffrey Gundlach explains
"In our view, mortgages offer lower
volatility and higher yields than other
bond sectors. Historically, Agency MBS,
whose principal is guaranteed by the
U.S. government, have always had lower
volatility as measured by standard
deviation than other investment grade
sectors due to their lower duration."
I believe GSE's are the same thing as agency mbs (fannie/ freddie,) and if so, the unrealized losses on these mortgages might be less than one might expect given the explanation by Gundlach.
Nevertheless, I am not entirely familiar with JEF's balance sheet and possible hedges. If you have any additional information about anything related to this subject or LUK in general, I would be greatly appreciative.
Lastly, consider the potential interest payments that the legacy LUK bond portfolio could generate if rates continue to rise to more normal historical levels and the short term bonds are reinvested into long term bonds at much higher rates....could take several years though.
LUK has carried a large position in government bonds for years.
I'm re-posting this B/S summary from another thread:
At 12/31/12, LUK reported the following major categories of assets (pre-merger):
- JEF ~ $1.0 billion
- Current assets ~ $2.5 billion ($1.7 billion in govt bonds; the balance is cash and working capital for the operating businesses, mainly Beef)
- Non-current available for sale ~ $1.8 billion (including $935m in equities, mainly Inmet ~ $870m; and $756m in bonds, mainly govt bonds)
- Intangibles/GW ~ $900 million (mainly Beef)
- DTA ~ $1.2 billion
- Other assets/PPE ~ $1.2 billion (mainly Beef)
- Associated companies ~ $800 million, ex JEF ($1.8 billion, incl JEF)
So ~ $2.5 billion in govt bonds pre-merger ($1.7 billion in current assets; and roughly $800 million in non-current AFS securities). I agree with DTM -- I'd expect an unrealized mark-down on the bond portfolio in Q2.