Sohn Investment Conference Notes 2015: Einhorn, Tepper, Ackman, Robbins & More ~ market folly

Monday, May 4, 2015

Sohn Investment Conference Notes 2015: Einhorn, Tepper, Ackman, Robbins & More

The 2015 Sohn Investment Conference just took place in New York where hedge fund managers pitched their latest stock ideas to benefit the Sohn Foundation and pediatric cancer research. 

Sohn Conference New York: 2015 Notes

- David Einhorn (Greenlight Capital): Short Pioneer Natural Resources (PXD).  Compared it to St. Joe (JOE).  Energy companies with negative development economics, negative on frackers in general.  US production boom: Bakken, Eagle Ford, Permian.  Buy the land, set up drills (expensive).  Huge cumulative CAPEX, more than oil brought out.  None of them generated cash flow, even when oil was high.  $20B cash burn by group last year.  Depletion is the "D" in EBITDAX.  It's not really growth, because once you get the oil out it's gone.  CAPEX has been 75% of revenue over last 5 years.  Not natural gas frackers, they are fine.  PXD:  Well located, well run, Permian assets mainly.  #2 pure play behind EOG.  $26B market cap, EV $27B, may earn $1.50 per share next year.  Spent $19B in CAPEX last few years - funded partially by capital raises.  Proved reserves have been flat or down despite huge CAPEX.  $36 rev/bbl, if you take out the $28 CAPEX, they lose $12/bbl.  Negative NPV if you include time cost of money.  If you had used $68 price of oil, reserves are only worth $9/share.  He says if you cut their costs, it's $22/share.  Value creation per $ spent is only 0.74.  You can view Einhorn's slideshow presentation on PXD here.  For even more from him, we recently posted up Greenlight Capital's Q1 letter as well.

- Barry Rosenstein (JANA Partners): Walgreens (WBA) and Qualcomm (QCOM).  WBA an example where activism worked.  12 layers of management between CEO and store managers vs. 5 at CVS.  Turnaround began with deal to buy Alliance Boots.  Then they got involved (cost cutting, tax inversion talks, but they didn't actually do the latter).  QCOM: Bloated costs, board with no owner orientation, family in positions, issuing a lot of stock.  He tries to downplay the breakup idea (tech analysts say it can't be done).  He says they need to return capital; doing a $15B repurchase, which is 13% of market cap (says they have 30 per share in cash).  He wants to cut/change management compensation, reduce board size, evaluate corporate structure (break off the chipset business).  Smartphone market is large and growing, IP model approved by China (although many OEMs still not paying royalties).  For more from this manager, we recently posted Rosenstein's appearance on Wall Street Week.

- Keith Meister (Corvex Capital): Long Yum Brands (YUM).  1/3 in China, outside of that it's almost all franchise, inside it's owned.  KFC, Taco Bell, Pizza Hut restaurants.  Says China problems are being fixed.  Top 5 holder of the stock.  Says franchise mix leads to more leverage, better multiples.  Simply put it's a bet on recovery in China (previous food issues at KFC).  SSS getting better, but still negative.  51% of those surveyed in China said KFC was their favorite place to eat.  Today 0.97 of $2.09 in earnings is China.  If they go back to '12 rev/unit, it would be over $3 EPS from China alone in 2017, that would be about $6 EPS in 207, with stock at $60, paying only about 10x now.  China business is very different - should spin it off.  Have it enter a franchise business deal with the main "FranchiseCo."  Says it unlocks $16/share of value.  ChinaCo becomes "more Chinese" which helps in China.  Valuation: 50-90% upside.  $130-16 PT.  Franchise co worth $88 in 2017, ChinaCo, $41-72 depending on how well it recovers from the food scandals.  Dan Loeb's Third Point also laid out the YUM investment thesis its Q1 letter.

- Larry Robbins (Glenview Capital): Long Abbvie (ABBV) & Brookdale Senior Living (BKD).  Money is cheap now.  BB junk bond 10-12 year debt for less than 4% after tax.  Own over-capitalized businesses and have them borrow money.  ABBV:  Old school pharma to new.  Spending 16% of revenue on R&D.  Structural acquirers and owner-activists pressure them on both sides.  Why ABBV?  1. Growth through 2020, 2. Numerous areas of upside optionality, 3. Excess cash they could use for acquisitions.  Says Humira grows through 2017, acknowledges the debate about patents expiration.  Biosimilars are not exact copies.  6 key upside optionalities: Pipeline is underappreciated, making biosimilars is 1000x harder than generics (state by state regulation, difficult process, etc), Humira patent protection possible, could change formulation of Humira to extend economics, look at Evercore ISI work, paying 30% repatriation tax plus dividend taxes in US "don't give it to us, keep it and do something productive with it", says they could buy 30% of shares with leverage, adding $15 to share price, also could be more M&A "they could be the pill swallowed, or be the Pacman."  Almost a double from here.  BKD: Bet on the aging population.  By far the largest and can sell ancillary services in same facilities.  Also real estate options.  You can also read Robbins' thesis on other stocks in Glenview's recent letter.

- Lee Cooperman (Omega Advisors): 8 stock picks (ACT, AER, C, DOW, GOOGL, GM, PCLN, GULTU).  Generally bullish, 7-9% return on market, appropriately valued, negative view of fixed income.  35% of stocks in SPX yield more than bonds.  Inflation is not bad for stocks - it raises their nominal revenue.  Bear markets occur for one of four reasons: oncoming recession, overvaluation, geopolitical event occurs, hostile Fed.  Nothing today indicates oncoming recession.  He says he doesn't understand the consternation about the Fed hiking rates.  On average, the stock market raised 30 months after the first hike, the shortest was 10 months.  On average, a year later, market is up 9.5% the year after a rate hike.

- Mala Gaonkar (Lone Pine Capital): Long Microsoft (MSFT).  Value hidden in legacy tech.  1.5B installed office users globally, only 250M actually pay for it.  New stronger management (Satya Nadella).  Built the cloud platform Azure. Works with 3rd party software, no more "saving Windows first."  Solid mid-to-high single digit revenue growth.  Most controversial aspect of this pitch.  Fear is consumer Windows will die, but it is only 5% of revenue.  Enterprise software is 17%, and more more sticky.  Mainframes still a $5bn annual business and they are using MSFT software.  "Price elastic market" very stick in ADBE, Autodesk as well.  Cloud is 10% now, growing faster than the rest of the business.  Office 365 more than doubles users.  Reduces piracy.  Operating cost cuts.  Been no restructuring since dawn of PC age.  Spend $1bn marketing consumer Windows.  Cloud shift cuts costs - no commissions to pay resellers.  Capital return, has way too much cash.  Raised share buybacks, but should be much higher.  Could earn 3.89 next year, fro 3.04 this year.

- Jeff Gundlach (DoubleLine Capital): Puerto Rican Muni Bonds.  They have priced in a lot of problems.  Triple tax free yield of 11% for 8s2030 at about 78 of face.  Says they may go lower first. "You're supposed to buy them at 78."  Also talked about negative interest rates and said to borrow infinite amounts at that level.  Fed talk is just noise.  2 year Treasury bottomed 4 years ago - you can see it on the chart.  Same with 10 year - 2012 was the low.  Very bearish on junk bonds, says no one alive in the room has lived through a secular rise in high yield bond yields.  Junk bonds do NOT do well when the Fed starts hiking rates.  A couple of years of runway.  For more from Gundlach, watch his appearance on Wall Street Week.

- David Tepper (Appaloosa Management): Thoughts on markets.  Also said junk bonds are not cheap.  "Something has to give."  "Either stocks have to go up a hell of a lot, or treasuries will go down a hell of a lot."  Could 22.78 P/E vs average now 17x on stocks.  Implies 30% move if treasuries don't move.  Monetization of debt in China.  "Don't fight the Fed; don't fight 4 feds."  (US, ECB, Japan, China).  Implies Hong Kong stocks are cheap, 10x P/E.  "Maybe the big banks aren't that bad if you look at them."  Don't short options that lengthen (they become more valuable).  This is why it's risky to short China.  What happens when China does first cut?  Stocks start going up.  Reinflation of their economy.  Says terrible environment for bonds.  "This monetary policy has worked for 5 years."  Now all 4 central banks are going one way.  "Good luck" with shorting.

- Bill Ackman (Pershing Square): Long Jarden (JAH), Platform Specialty Products (PAH), and Valeant Pharmaceuticals (VRX).  JAH: 45x return in 14 years, constantly undervalued over the years.  Always valued on next year's EPS.  PAH: A shell they funded.  NOMHF: Nomad, another shell/SPAC.  Flat at cash value for a year, then bought Iglo and the stock went up 80%.  Why is the market mis-valuing these companies?  He calls them "Platform companies" not just on multiples based on comaprables.  Others as examples: Danaher, Liberty Media, AB InBev, Transdigm.  Key is to find the right management teams that do good acquisitions.  VRX: Paid $196/share, 20m shares, 20% of his capital.  Tax-advantaged structure.  Units have autonomy.  Drawback is there is a lot of competition in acquisitions.  Gives the example of the Bausch & Lomb acquisition.  Value of business is correlated with ability to buy companies and integrate them, take synergies.  PT $332, from $223.  Based on organic growth and small deals.  Compares it to a Berkshire Hathaway in the making.  For more from Ackman, check out Pershing Square's presentation from its European investor meeting.

- Ian Bremmer (Eurasia Group):  Geopolitical analyst.  Oil production in the US has reduced our willingness to engage in fights, especially in the Middle East.  "Weaponization of Finance" to use finance to influence behavior.  US may have realized that they spent so much in Iraq and the country still fell apart.  "We will see $100 oil no time soon."  "Likely to see an Iranian deal, which will be another 1.2m barrels a day."  Putin is in a corner.  More Russian cyber attacks against the US.  China - the rise is important.  They are not confronting the US militarily.  Economically China does want to challenge US hegemony.  "Best money the Americans ever spent was the 4% of GDP on the Marshall Plan.  It paid off for decades."  The only country in the world with a cohesive global strategy is not us, it is China.  China does not want to occupy countries.  Some countries will be hedging, and ally with China economically.  Including Germany, South Korea, etc.  For the next 5-10 years, China is more stable than you think.  They will be the world's largest economy, but they will be totalitarian still, and will have a lot of world influence.

- Jay Walker (Founder of Priceline): Black Swan events more likely than ever.  A few people with a few million dollars could wipe out billions in market cap.  "Bioweapons plus drones plus social media."  Risk of economic collapse.

- Sohn Investment Contest Winner (Angelo Martorell, Wharton Student): Long IAC Interactive (IACI).  Owns,,, Vimeo, HomeAdvisor.  $5.9bn EV.  Uses sum of the parts and says market not giving value for Tinder, because there is no revenue, profits.  IACI has all the best dating properties.  "Facebook of dating."  If Tinder was private it would be more than the market cap of entire IACI.  Says 1/4 of millenials won't marry.  "Network of effect."  Tinder premium will give unlimited right swipes, 2.5% of MAUs will pay for it.  $10/month.  Online dating makes it very easy to have an affair.  Tinder will crush Ashley Madison.  You can have dates in places you travel.  Cross-selling - some can go from Match to Tinder and vice versa.  Users spend 77 minutes/day on Tinder versus 40 minutes on Facebook.  Also it's fully integrated with FB.  Valuation?  Says you get Tinder for free with current stock price.

Next Wave Sohn New York 2015

- Snehal Amin (Windacre Partnership): Long PowerFinance

- Didric Cederholm (Lion Point): Ukrainian sovereign bond play (steepeners) & Ally Financial (ALLY)

- Alex Denner (Sarissa Capital): Long Ariad Pharmaceuticals (ARIA)

- Daniel Dreyfus (3G Capital): Long Phillips 66 (PSX)

- David Zorub (BlueMountain): Long Sunrise Communications

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