Third Point Reveals CF Industries Position: Q2 Letter ~ market folly

Monday, July 29, 2013

Third Point Reveals CF Industries Position: Q2 Letter

Dan Loeb's hedge fund firm Third Point is out with their Q2 letter to investors.  In it, they reveal a brand new position in CF Industries (CF):

Third Point's CF Industries Thesis

Third Point writes,

"CF Industries is North America’s largest nitrogen fertilizer manufacturer and one of the  lowest-cost producers globally. CF currently trades at an unwarranted discount to  fertilizer and commodity chemical peers. We believe its structural cash flow generation  strength is misunderstood and that management should deliver a much larger dividend to  its shareholders. Such a dividend would highlight the sustainability of its cash flow  generation and lead to a substantial re-rating."

They see CF's ability to tap lower-cost natural gas in North America as an advantage and the spread between CF's production cost and higher cost producers is a nice benefit:

"On today’s  equity value, that would mean CF is currently trading at an 11% free cash flow yield using  these onerous assumptions. Given the low-risk profile of this portion of CF’s cash flow, it  should receive a bond-like multiple (e.g. 7 - 8% yield), which alone implies significant  upside to the current share price."

Sells Gold Position

It's also worth highlighting that Third Point exited its gold position at the beginning of the 2nd quarter at around $1450.  They see it as an asset that will be hurt as real yields rise.

The letter also touches on Third Point's activist stakes in Sony (SNE) and Yahoo (YHOO).  The hedge fund recently sold a chunk of its YHOO stock to the company.

Embedded below is Third Point's Q2 letter to investors

For more recent hedge fund letters, we also posted up excerpts from Viking Global's Q2 letter.

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