We are upgrading our recommendation on the shares of Loews Corp. (L) to “Neutral” from “Underperform” in view of our expectations of improved earnings from its CNA Financial segment, going forward.
Recently, CNA Financial announced an agreement to transfer its legacy asbestos and pollution liabilities to National Indemnity, a subsidiary of Berkshire Hathaway (BRK.A, BRK.B). This transaction will effectively eliminate CNA’s asbestos and pollution reserve risk, as well as any reinsured dispute and credit risk, thereby reducing earnings volatility.
We are also encouraged by the Boardwalk Pipeline segment, which continued with stable results during the second quarter, benefiting from increased available capacities and throughput from the pipeline expansion projects.
However, we are concerned with weaker expectation for revenues and operating profit for the HighMount segment, taking into account the divestiture of its Antrim Shale and Black Warrior Basin assets, besides continued challenging operating conditions.
We also expect a tepid revenue performance from Diamond Offshore, given low dayrates and a moratorium on Gulf of Mexico deep water rig drilling.
Loews maintains a strong and liquid balance sheet. Also, it has traditionally indulged in buying back shares aggressively. During the first half of 2010, the company repurchased 8.1 million shares of its common stock, and we expect the company will continue repurchasing, thereby creating shareholder value.
Loews is slated to release third quarter earnings on November 1, 2010. The Zacks Consensus Estimate puts earnings at 32 cents per share. The company threw a positive earnings surprise during its second quarter, benefiting from favorable reserve releases from CNA Financial.
The stock of Loews carries a Zacks #3 Rank, which implies a Hold recommendation over the near term.