I’m a big fan of some of the institutional investors (Davis Selected Advisers, Brandes Investment Partners) that own shares in Loews Corp. (NYSE:LTR), a diversified holding company with ownership interests in several businesses including CNA Financial (NYSE:CNA), Lorillard, Inc., Boardwalk Pipeline Partners, LP (NYSE: BWP), Diamond Offshore Drilling, Inc. (NYSE: DO), Loews Hotels, and Bulova Corporation. All are either wholly owned or majority owned subsidiaries of Loews Corp.

It’s not often that I look at conglomerates or disparate holding companies like Loews but this one gets my attention for several reasons:

• The businesses they own with the exception of Bulova and Loews Hotels are relatively resistant to recession. They’ll make money in good or bad economic conditions.

• The pipeline and drilling operations are businesses that should stay busy in the coming years, at least until someone develops an alternative to crude oil and natural gas.

• CNA Financial has a commanding position within the commercial property and casualty insurance markets in the United States.

• The company’s 37 percent economic interest in its Carolina Group (NYSE:CG) tracking stock pays 8 percent interest on the debt owed to Loews, $1.2 billion at the end of 2006, in addition to the dividends from its 65 million Carolina Group shares.
  

CNA Financial contributes 58 percent of Loews total revenue and 37 percent of pre-tax income. The company operates in two main areas: the first, standard lines, sells property and casualty policies to small and medium sized businesses and the second, specialty lines, insures professionals against liability and risk management issues. The two segments account for more than 90 percent of CNA’s total insurance business. A turnaround took place in 2006. Although revenues were up a mere 5 percent, pre-tax income grew ten fold to $1.7 billion, including $150 million from investment gains. For those of you familiar with Warren Buffet, you’ll likely know of his affection for insurance companies and their propensity to produce hordes of investment income. He practically built Berkshire Hathaway with this type of cash flow.

Pre-tax margins improved tremendously in 2006 from a lowly 2 percent the year before to almost 17 percent just one year later. The impact on the holding company was significant with overall pre-tax income more than doubling from $1.8 billion to $4.5 billion at the end of 2006. It’s no wonder Loews stock is up over 35 percent in the last 52 weeks.

The best is yet to come. Barring some unforeseen disaster that dramatically increases insurance claims, like Katrina, this stock has plenty of room to move. When you compare it with the much bigger competitor, American International Group (NYSE:AIG), on almost every valuation basis, Loews stock is significantly cheaper. The reason: it’s an extremely misunderstood company. While it’s nominally a property and casualty company, in reality it’s much more. Some may consider it a conglomerate; others might label it a cigarette manufacturer.

The question becomes how to evaluate Loews stock. The current price to earnings ratio for conglomerates is 18.6, 10.7 for property and casualty businesses and 15.2 for cigarette manufacturers while Loews itself is 12.3. The previously mentioned revenue and pre-tax income numbers for CNA Financial make for even greater confusion. While the property and casualty unit produces more than 50 percent of total revenue, it generates less than 50 percent of pre-tax income; translation: the correct multiple to apply to Loews stock is anybody’s guess.          

In January 2002 in response to this valuation conundrum, Loews created the Carolina Group tracking stock to improve the value attached to its prized possession, Lorillard Inc., the third largest cigarette company in the U.S. and Loews most profitable business. Did the move pay off? Carolina Group stock is up 244 percent since the IPO.

Loews is a large-cap with a great deal of potential and given its reasonable price, despite the 30 percent run up in 2006, is definitely worth considering.