Why Dan Loeb Still Owns Delphi: Third Point's Q2 Letter ~ market folly

Wednesday, August 1, 2012

Why Dan Loeb Still Owns Delphi: Third Point's Q2 Letter

Dan Loeb's hedge fund firm Third Point is out with its second quarter letter to investors.  In it, they talk about why they still own Delphi (DLPH), as well as touch on numerous other positions.

Loeb writes, "In July, we increased our net equity exposure, initiated several new positions, and added to some existing names."  We revealed that Third Point bought new positions in News Corp and Chesapeake Energy in June.  We also recently highlighted how Loeb has also added to his Yahoo stake.

One of the new names they took a position in is the European IG bond index iTraxx.  The letter also details their position in Progress Energy Resources (PRQ).

Why Third Point Still Owns Delphi (DLPH)

The most interesting part of Third Point's letter is the detail of why they still own Delphi.  They originally purchased the company's DIP loan facility in June 2009 and continue to hold after the company has completed its initial public offering.

Third Point writes,

"In our view, Delphi is a best-in-class supplier which still trades at the valuation of more commoditized and disadvantaged comparable companies.  Delphi has premium business lines, an excellent geographic customer base, no need for further deleveraging, virtually no North American unionized labor, and significantly smaller pension liabilities than almost all of its peers.  Using multiples closer to the upper quartile of suppliers - where we feel Delphi belongs and is headed - Delphi's stock should be worth between $35-$40 per share, or a 30-40% upside from current levels."

The list of large owners of Delphi stock is littered with prominent hedge funds (as of the end of the first quarter): Paulson & Co, Elliott Management, SIlver Point Capital, Oaktree Capital, Centerbridge Partners, Greenlight Capital, Perry Capital, Senator Investment Group, Owl Creek Asset Management, Monarch Alternative Capital, and many more.

Third Point highlights this ownership base in their letter and identifies it as one of the "biggest concern(s)" for Delphi owners.  They foresee a diversification of a currently concentrated shareholder base which will reduced volatility.

Also worth highlighting is the fact that numerous directors of Delphi have sold shares recently, combining for over $5.46 million in sales.

Third Point continues, saying:

"We expect Delphi to expedite its multiple expansion by returning a significant portion of its free cash flow - about 25% of the current market cap by year end 2013 - to shareholders through continued share repurchases and the initiation of a quarterly dividend."

Embedded below is Third Point's Q2 letter to investors:

For more on this hedge fund's portfolio, head to Third Point's latest exposure report.

And to read more hedge fund letters, check out the latest from David Einhorn's Greenlight Capital.

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