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Monday, August 28, 2006

Insider Buying at Leucadia (LUK) & Selling at Foster Wheeler (FWLT)

By Yaser Anwar, CSC of Equity Investment Ideas

Insider BUYING: Leucadia National (LUK) - Date of Trade: 8/22/06 - Average Price: $25.83

Recently Alan Hirschfield, Director at LUK bought the $258,332 purchase of 10K shares at $25.83 each. After all, there is a compelling case against conglomerates. Capital markets, the argument goes, are better than chief executives at allocating resources among industries. Why should fund managers who like, say, telecoms also be forced to invest in property? If they want exposure to both, they can build a portfolio better than any conglomerate boss could.

Conglomerates therefore tend to have lower market values than the sum of their operations. Focus brings other benefits too. Managers do not divide their time, energy and expertise among industries.

These arguments, however, appear to apply only in a specific historical context. Take America, which probably has the most focused companies in the world: the oft-cited success of General Electric , an outstanding conglomerate, is the exception that proves the rule.

Yet a century ago Americas biggest companies were all conglomerates, run by robber barons not unlike todays tycoons in poor countries. De-mergers and spin-offs became seriously fashionable only after the 1970s.

The most likely explanation for this evolution is that conglomerates go out of fashion as markets become more efficient. Two professors at Harvard Business School argue that efficiency arises from the presence of specialized intermediaries. In the market for capital, these are mutual funds, venture capitalists, equity analysts, auditors, and so forth. In the market for labor, they include executive-search firms, vocational and business schools, and certification agencies.

In the markets for products and ideas, they include intellectual-property lawyers and consumer activists. The America of the Rockefellers and Morgans had few such intermediaries, just as poor countries do today.

Like GE, however, LUK is an exception that proves the rule. And a little bit of everything goes a long way at this New York-based company. It has stakes in businesses ranging from copper mines and banks to wineries, internet services and timber.

Since LUKs founding more than 150 years ago, it has also acquired outfits in manufacturing, health care, insurance and real estate. And LUK is quick on its feet for a company a century and a half old. Annual profits for the past three years have grown an average of 98% with revenues topping $1 billion last year.

Nor is LUK slow to put an underperforming asset on the chopping block: WilTel Communications was sold for more than $833 million last year which, despite its lack-luster performance, meant that LUK turned a profit on this company.

Clearly, LUK is a premium conglomerate that manages its portfolio aggressively, setting its subsidiaries clear targets and ditching underperforming companies. Or, as the legendary Jack Welch, former boss of GE used to say: fix, sell, or close. Most recently, LUK has bought a 9.9% stake in iron-ore group Fortescue Metals, which along with the acquisition of a $100 million note of one of its subsidiaries, makes a total investment of $400 million.

A study (Break-Up! When Large Companies are Worth More Dead than Alive) by Atulya Sarin of Santa Clara University and David and Diane Denis of Purdue University some years ago found that firms are more likely to focus when the managers themselves own lots of equity.

That is the case at LUK, where as well as Mr. Hirschfield its directors are major shareholders. All the more reason to buy the stock, at $25.32 on a PE of 11.86.

Insider SELLING: Foster Wheeler (FWLT) - Date of Trade: 8/21/06Average Price: $42.61

Earlier this month Ray Milchovich inked a contract, effective August 11, to continue as Chairman, President and CEO FWLT. Ten days after it took effect, he sold 141,565 of his companys shares at $42.61 each, pocketing $6,032,297.

On August 9th posted second quarter earnings of $108.4 million, or $1.53 a share, compared with $27.9 million, or 55 cents a share, a year earlier. Revenue increased 42% to $745.3 million from $526 million in the same period last year with new orders booked rising 66%.

Given that at the end of May both S&P and Moodys raised their credit ratings for FWLT. Its Engineering & Construction group designs and builds facilities for the oil and gas, chemical, pharmaceutical, and other industrial markets while FWLTs Power Products & Services subsidiary makes steam-generating units and related equipment for power and industrial plants.

At first, with higher profits and an increased credit rating, FWLT would appear to have put its years of balance sheet and asbestos related problems behind it.

Trouble is, its businesses are highly cyclical and such a large sale of stock by its boss suggests that perhaps the light at the end of the tunnel could indeed be an oncoming train.

Sources: SEC Filings, Insider Moves & Y! Finance

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