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Merchant Banking Holds Back Leucadia's Profits

Leucadia National (NYSE: LUK) is a challenging company for many investors to understand. Its biggest business is its National Beef meat company, which generates more than double the revenue of any other business unit within the conglomerate. Yet many investors know Leucadia best for its Jefferies Group unit in the financial industry. Moreover, you'll find several other smaller businesses in the financial and merchant banking industries that flesh out the Leucadia portfolio.

Coming into Thursday's third-quarter financial report, Leucadia investors were prepared for weaker results from the company. In that light, the company's big boost in revenue came as a pleasant surprise, and better bottom-line performance than anticipated also helped to show the resiliency of Leucadia's business model. Let's look more closely at how Leucadia National did and whether it can fully recover from its challenges in the near future.

Image source: National Beef.

Leucadia deals with a rough patch

Leucadia's third-quarter report revealed the countervailing factors that the conglomerate consistently has to handle. Overall revenue climbed 8% to $2.90 billion, easily besting the flat performance that most of those following the stock were looking to see. Yet net income attributable to Leucadia common shareholders was down by more than a third to $99.4 million. That produced earnings of $0.27 per share, which were down substantially from 2016's third quarter but were far better than the $0.17-per-share consensus forecast among investors.

Leucadia's core businesses did extremely well during the quarter despite the mixed numbers above. The National Beef unit saw revenue jump by a sixth, and pretax segment income jumped by more than 60% from year-earlier figures. Similarly, the Jefferies Group division saw an even bigger revenue gain of more than a fifth, and pretax income jumped by more than half.

Leucadia cited several factors in driving that performance higher. At National Beef, balanced supplies of cattle and strong demand in the end market helped boost margin figures. Meanwhile, at Jefferies, record revenue from investment banking operations were a welcome complement to good results in the fixed income and equity arenas. Most of the conglomerate's other business also added to Leucadia's success.

Again, though, Leucadia's merchant banking business threw cold water on a strong performance. Share price declines in its HRG Group holding reversed gains from earlier in the year, and that produced a huge mark-to-market loss of nearly $98 million. That compared to a gain of $92 million in the year-ago period, and that swing was enough to wipe out the strength that Leucadia saw in National Beef, Jefferies, and elsewhere.

What's ahead for Leucadia?

CEO Rich Handler expressed his satisfaction with how things went. "We are pleased with Leucadia's third quarter results," Handler said alongside President Brian Friedman, "reflecting an excellent quarter for both Jefferies and National Beef." The executives called out the Berkadia, Garcadia, and Idaho Timber businesses as well in contributing to overall performance.

Leucadia accelerated its repurchases of its shares during the quarter. Purchases of 2.5 million shares occurred at an average price of $24.89 per share, doubling the pace of second-quarter buybacks. The company is about halfway through its current repurchase authorization and has 12.5 million shares remaining that it can buy if it wishes.

Shareholders didn't have a strong reaction to how Leucadia did, and the stock rose only a fraction of a percent in after-market trading following the Thursday afternoon announcement. Nevertheless, investors should be pleased with how the most significant parts of the Leucadia business empire did during the quarter, and signs point toward continued success for the foreseeable future at the company.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Leucadia National. The Motley Fool has a disclosure policy.