Children's Investment Fund on News Corp, Union Pacific & Walt Disney: Q2 Letter ~ market folly

Monday, September 17, 2012

Children's Investment Fund on News Corp, Union Pacific & Walt Disney: Q2 Letter

The Children's Investment Fund manages approximately $4.7 billion and has returned 15.7% annualized.  Year to date through the end of the second quarter, they were up 16.39%. 

Founded by Christopher Cooper-Hohn, Children's has assembled quite a concentrated portfolio and we wanted to highlight some excerpts from their second quarter letter.

Children's Top 10 Positions as of Q2 

1. CESP: 18.2% of fund NAV
2. News Corp: 18.1%
3. Lloyds Bank Bonds: 17.9%
4. Japan Tobacco: 16.8%
5. QR National: 13%
6. Red Electrica: 9.7%
7. Porsche SE: 9.6%
8. Coal India: 8.6%
9. Walt Disney: 8%
10. Enagas: 7.3%

Railroads: QR National & Union Pacific

Children's owns QR National where the thesis has been focused on a transition from government-run entity to private company.  Management is focused on improving operating performance and achieving growth through investment. 

Children's expects the balance sheet to re-leverage over time, anticipating aggressive share buybacks (inclusive of any selling the government might do with its remaining 34% stake).  Of the stake, Hohn writes,

"With 7-8% normalised unlevered free cash flow yield, considerable volume and legacy contract re- pricing, we believe QR should compound at above 20% pa medium term returns. QR’s significant hard asset backing and very conservative balance sheet limit the downside of the investment. We believe the fair value of the asset is approaching double the current share price."

They also own a stake in Union Pacific (UNP) and while they see coal headwinds continuing there, they believe the company can grow EPS at 13% for the next several years and generate an IRR of 15%. 

On News Corp

Given that News Corp is one of their largest positions and many other hedge funds own it, we wanted to highlight Children's commentary on the name.  They're fans of the company's impending split and write:

"At the end of the quarter, the stock is on 11x forward earnings on our numbers and 6.5x EBIT. Low double digit net income growth driven by affiliate fees and re-transmission consent, and supported by the expectation of continued buybacks drives 20%+ net income growth and a 30% midterm IRR without a re-rating. We believe that as the market grows increasingly comfortable with the improved corporate governance at News Corp, the stock can comfortably achieve a 13-14x earnings multiple which 2 years out would point to a $37-40 target price compared to $22 today."

On Walt Disney

Lastly, Children's likes that the Parks segment will see capex programs slow down and think the company will see margin leverage.  They write,

"In the near term, margin recovery in the Parks and share buybacks will drive EPS growth up to near 20% for the next few years. We forecast EPS of $3.6 in the upcoming year and $4.2 in the following year. On a 14-15x multiple, this should give a share price trading target of around $60."

For more hedge fund Q2 letter excerpts, we've posted up:

- Eminence Capital on Google

- Scout Capital on Anheuser-Busch InBev

- Bill Ackman on why he sold Citigroup

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