Third Point's Q3 Letter: EssilorLuxottica Thesis

Dan Loeb's hedge fund firm Third Point is out with its third quarter letter.  In it, they touch on activist investing, their successful investment in Sotheby's (BID), an update on Sony (SNE) and Argentine Credit, and also outline their thesis on newer holding EssilorLuxottica.

Of the latter, they write:

"Our analysis of potential merger synergies points to over €1 billion in additional profit through efficiencies and revenue growth, almost double the Company’s current targets.  In the near‐term, this will be driven by cross‐selling to wholesale customers, insourcing lens procurement, and supply chain efficiencies.  The longer‐term opportunity to disrupt the industry value chain is even more appealing: combining lens and frame to shrink raw material need and waste, reducing shipping costs by merging prescription labs with global distribution hubs, and providing a true omni‐channel sales offering.  These initiatives will transform the way glasses are sold, significantly improving the customer experience."

Third Point sees the company earning over 8 euros of EPS in 2023 and for earnings and FCF to grow at a mid-teens compound annual growth rate.

Embedded below is Third Point's Q3 letter:



You can download a .pdf here.

For other recent hedge fund letters, you can also read Howard Marks' latest letter here.

Marcato Capital Sells Some Sotheby's Shares To Company

Mick McGuire's activist firm Marcato Capital Management has filed an amended 13D on its position on Sotheby's (BID).  Per the filing, Marcato now owns 4.9% of BID with 2.62 million shares.

This is a change from the 5.27 million shares they reported on their 13F filing at the end of the second quarter.

The filing notes that Marcato entered into a share repurchase agreement with Sotheby's where BID agreed to purchase 2.05 million shares of BID from Marcato at $36 per share on October 4th.

For more on this fund, we've highlighted other recent portfolio activity from Marcato.

Per Google Finance, Sotheby's is "a global art business company. The Company operates in two segments: Agency and Finance. The Agency segment earns commissions by matching buyers and sellers of authenticated fine art, decorative art, jewelry, wine and collectibles (collectively, art or works of art or artwork or property) through the auction or private sale process. Agency segment activities also include the sale of artworks that are principally acquired incidental to the auction process and the activities of RM Sotheby's. The Finance segment earns interest income through art-related financing activities by making loans that are secured by works of art. Its activities include Sotheby's retail wine operations, Acquavella Modern Art, an equity investee, and sales of the remaining inventory of Noortman Master Paintings, an art dealer that was owned and operated by Sotheby's are reported within all other segment."

Mick McGuire's Sohn Canada Presentation: Long Sotheby's & Virtus Investment Partners

We're posting up notes from the Sohn Canada Investment Conference 2015 (Capitalize For Kids.)  Next up is Mick McGuire from Marcato Capital.  He presented two long ideas: Sotheby's (BID) and Virtus Investment Partners (VRTS).

Mick McGuire's Sohn Canada Presentation

-    LONG Sotheby’s (BID) 
-    Agent in the art collection industry primarily hosting auctions and private sales
-    Trading at 8x EBITDA, 31% EBITDA margin, 47% share of a $12.9Bn market
-    Business is split into two divisions: agency and financial services
-    Agency performs the auction and private sale process

•     Not capital intensive, provides consistent return with a fairly amount of inherent leverage as larger purchases provide additional commissions. 

-    Financial services business is where they lend on the purchase of art

•     Interest at 7%, < 50% LTV, guaranteed by collector 
•     Funds this business with a low cost $1Bn revolver 
•     Run rate $50MM 

-    Frothy art market may be a negative catalyst but Mick sees growth in the private sales market as this has little penetration to date from Sotheby’s.
-    Opportunity to grow financing division to add additional net interest income
-    Reasons for undervaluation

•     $450MM excess cash on books 
•     $250MM in inventory a.k.a. art and jewelry, sell side appoints no value to this but there is definitely value in these items 
•     Real estate owned by the company, approximated value of $175MM for the NYC location and $250MM for the London location 
•     Additional value in the loan book 
•     Currently $774MM in loans, $594MM in debt against these loans, currently 77% LTV with a target of 85% providing additional interest margin. 

-    Catalysts

•     Refinancing of the NYC location should close in Q3 
•     $250MM share repurchase  
•     Approximately $1.1Bn in non-operating assets a.k.a. redundant assets that could be sold which is 40% of the market cap 
•     A new CEO was brought in and personally invested $2MM and has a compensation package oriented to long term stock price appreciation. 
•     With the redundant assets removed, the stock is trading at 4.1x EBITDA 
•     Mick sees the position at ~$50/share or 60% upside from today’s prices.      

-    LONG Virtus Investment Partners Inc (VRTS) 
-    Asset management with a distribution platform that primarily uses sub advisors to manage funds.
-    The balance sheet is misunderstood providing upside for the stock if value can be released.
-    It has a market cap of approximately $1Bn and an enterprise value of $480MM
-    Trading at 6x earnings
-    Has a 15% AUM CAGR (which is evenly distributed between net inflows and performance)
-    VRTS seeds most of its own capital to begin with, due to accounting these are seen as cash outflows which skews the cash flows from operations
-    This is called their accelerate seed program and it is funded by a $100MM issuance and FCF -    They have $115MM in FCF when adjusted for this
-    EV/LTM EBITDA is 3.7x
-    Have a reputational concern due to a fund “AlphaSector Fund” using backtested returns for marketing. Outflows from this fund have skewed the net inflows/outflows figure to the worse causing the trend to look poorly. When adjusted the AUM has had consistent inflows. Once the AlphaSector is behind them in Q1 2016, the figures will market properly.
-    Industry EV/EBITDA is closer to 8x
-    Cash and investments are approximately 50% of the net assets, most sell side analysts are putting discounts on this figure for unjustified reasons.
-    Currently trading at $98, sees the stock at $224/share in 2-3 years through the combination of value activation activities such as returning cash to shareholders.


Be sure to check out the rest of the presentations from the Sohn Canada Conference.

Jim Chanos on Wall Street Week: Short Selling, Sotheby's, Energy, China & More

Anthony Scaramucci's rebooted version of Wall Street Week continues its streak of impressive guests.  This week, Kynikos Associates founder and noted short seller Jim Chanos appeared on the program.

He talks about how he got involved in the stock market and why short selling is important.

Chanos also touched on why it's important to set capital limits (position sizes) on shorts.  While a short can only go to zero, it can move against you and technically go up infinity.  When a short position moves against you, it actually gets larger in size.  So you have to ask yourself: how much am I willing to bet on this position?  He mentioned 2% to 3% as a typical sized short and never more than 5%.  "Never let one idea carry you out."

As to where he looks for shorts, he likes: flawed accounting, structurally unsound businesses, and businesses on the wrong side of a deep cycle.

Specifically, Chanos noted he is short Sotheby's (BID) as the company has benefited from the easy money generated by quantitative easing worldwide.  While he sees the company as a proxy for measuring how the ultra wealthy are faring (are they buying more art and fine goods or not?), he argues that BID is not a good way to play that because their business model is deteriorating as they compete with Christie's and super dealers.

Chanos also notes he's bearish on the energy space as the integrated oil space has problems.  We've detailed Chanos' presentation at the SALT conference. 

Lastly, he also shared his views on China.


Embedded below is the video of Jim Chanos' appearance on Wall Street Week:



If you missed them, be sure to check out Barry Rosenstein's appearance on Wall Street Week, as well as Carl Icahn's interview and Jeff Smith's appearance as well.  Jeff Gundlach also appeared too.

Marcato Capital's Presentation on Sotheby's & Dillard's

Mick McGuire of hedge fund Marcato Capital Management recently made a presentation on both Sotheby's (BID) and Dillard's (DDS) at the Active Passive Investor Summit.

They are activist investors in Sotheby's and their thesis is summed up by: significant levels of unproductive capital, inappropriate mix of debt & equity, and desire for more shareholder friendly capital allocation.  Daniel Loeb's Third Point is also a BID activist here.

Marcato also presented a passive investment example in Dillard's where activists got involved in the stock a few years ago, the stock continued to drop and the activists eventually bailed on their position. 

Dillard's went on to turn itself around and Marcato thinks it's an attractive passive investment opportunity today as it trades at a 12% free cash flow yield and is using FCF to buy back shares.  The hedge fund thinks DDS could head as high as $155 per share (currently trades around $95).

Embedded below is Marcato's slideshow presentation:




You can view other activity from Marcato here.

Third Point Seeks Sotheby's Board Seats

Dan Loeb's hedge fund firm Third Point revealed in an amended 13D filing that they're seeking 3 board seats at Sotheby's (BID).  You'll recall that Third Point initiated an activist stake in BID last year and pushed for corporate change. Third Point now owns over 9.5% of the company with 6.55 million shares.

While they're pleased the company announced it will return $450 million to shareholders via buyback and dividends, Loeb seeks to nominate himself, Harry Wilson, and Olivier Reza to the board.

The company has agreed that Loeb would be an "appropriate member" but Third Point also wants more representation.  Third Point also outlined other thoughts on the company which you can read here.

Other activists have also been involved in this stock, including Mick McGuire's Marcato Capital Management.

If you want to play catch up on the thesis, we analyzed Sotheby's in the Q3 2013 issue of our Hedge Fund Wisdom premium publication (not to mention, a brand new issue was just released).

Marcato Capital's Presentation on Sotheby's: Excellence in Investing San Francisco

Mick McGuire of activist hedge fund Marcato Capital Management pitched Sotheby's (BID) at the Excellence in Investing San Francisco conference yesterday.  We'll be posting up notes from the event soon, but in the mean time here's Marcato's take on BID.

Marcato's Presentation on Sotheby's (BID)

McGuire feels there's an opportunity for BID to return capital to shareholders and suggests that a $1.3 billion accelerated repurchase (around 38% of market cap) could boost shares to $68, up 56% from July 30th close. He's also looking for various operational improvements that can contribute to the upside.

Marcato isn't alone on their bullish and activist stance on BID as Dan Loeb's Third Point sent a letter to the BID board recently.

Embedded below is McGuire's presentation from the Excellence in Investing San Francisco conference:



Check back soon as we'll be posting up notes from Excellence in Investing SF shortly!

Third Point Becomes Sotheby's Largest Shareholder, Sends Letter & Wants Board Seat

Today Dan Loeb's hedge fund firm Third Point filed an amended 13D with the SEC regarding their position in Sotheby's (BID).  Per the filing, Third Point has disclosed a 9.3% ownership stake in BID with 6,350,000 shares.

This marks a 154% increase in the size of their position since they initially filed a 13D on Sotheby's back in August.  Third Point was out buying BID shares sporadically throughout August and then really ramped up their stake on September 30th, buying a ton of shares in the low $49's.


Loeb's Letter To Sotheby's CEO

Loeb then sent Sotheby's CEO a letter which we've embedded below:




Third Point highlights pressing issues at the company, management's lack of alignment with shareholders, and limitations in formulating and executing strategic initiatives.

As we've highlighted before, a few other activist hedge funds own BID shares as well, such as Nelson Peltz's Trian Fund and Mick McGuire's Marcato Capital Management.

One funny sidenote to the story: CNBC's David Faber spoke with Loeb, who said that BID sent him to the investor relations department when he reached out to the company.  Classic.


Third Point's September Exposure Report

Also worth mentioning: Third Point's Offshore Fund finished September up 2.6% and is up 18% year-to-date.  The hedge fund's net long equity exposure at the end of the month was 45.8% net long (61.4% long, -15.6% short).

Mick McGuire's Presentation on United Rentals: Value Investing Congress

We're posting up notes from the 2013 Value Investing Congress in New York.  Next up is Mick McGuire of Marcato Capital Management and his presentation was entitled "Don't Buy This Recovery."  He pitched United Rentals (URI).

Mick McGuire's Value Investing Congress Presentation

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United Rentals (URI)

$5.9M market cap, $13B EV

5.6x EBITDA

12.2x P/E

Largest rental co in the world, built as a roll-up.

Fragmented market, they are biggest player but still only 15% of market.  400k unit fleet, original cost is $8B.  Just bought RSC that was 5% of the market, which added to their 10% share.

Pure play on North American Construction and Industrial markets.  NOT exposed to residential construction- that is only 4% of their revenue.  39% is Industrial, 47% is commercial construction.  Have yet to see a robust recovery in commercial construction.

Thesis: cyclical trends are positive, secular trends help, strategic merger creates the industry's only scale player.  Good capital structure, attractive valuation.  6.8% FCF yield, 12.2x P/E.  Says synergies, rides the cycle.  PT implies 72% appreciation.

Risks:  cycle.  How robust the recovery is.  Also, company could lose capital discipline and overspends on growth CAPEX.  They own 4.7% of the company and wield influence on CAPEX.  

MarketFolly note: URI was featured in the equity analysis section of our Hedge Fund Wisdom newsletter last year and is up 39% since then.

Q&A: 

On Sotheby's (BID):  How is the board reacting to their proposals?

"We've had a good dialogue so far."  

Be sure to check out the other presentations from the New York VIC here.

Dan Loeb's Third Point Boosts Sotheby's Stake: 13D Filing

Dan Loeb's hedge fund firm Third Point has filed a 13D with the SEC regarding shares of Sotheby's (BID).  In it, they reveal a 5.7% ownership stake in BID with 3,925,000 shares.

This marks a 57% increase in their position size since the end of the second quarter.  Third Point initially started their BID stake in Q1 of this year, ramped it up in Q2, and have now added to it further.  The 13D filing was required due to portfolio activity on August 15th.


Other Activist Investors Involved

Third Point's 13D contains the standard boilerplate saying that they intend to engage the board of management.  It's also worth highlighting that another activist investor is involved in shares as well: Mick McGuire's Marcato Capital Management.  They disclosed a stake in BID at the end of July.  Additionally, Nelson Peltz's Trian Fund Management just started a new position in Sotheby's in Q2 as well.

Per Google Finance, Sotheby's is "a global auctioneer of authenticated fine art, decorative art, and jewelry. The Company operates in three segments: Auction, Finance, and Dealer. The Company's Auction segment functions as an agent by offering works of art for sale at auction and by brokering private sales of artwork. Sotheby’s also purchases and resells works of art through its Dealer segment, conducts art-related financing activities through its Finance segment and is engaged, to a lesser extent, in brand licensing activities. The Sotheby’s name is also licensed for use in connection with the art auction business in Australia, art education services in the United States and the United Kingdom and print management services."

Marcato Capital Management Discloses Sotheby's Stake

Mick McGuire's hedge fund firm Marcato Capital Management today revealed a 6.61% ownership stake in Sotheby's (BID) with 4,511,719 shares, per a 13D filed with the SEC.  This is a brand new position for the hedge fund.

While they own common stock, the filing also highlights that the figures above are inclusive of stock options to purchase shares that are exercisable within the next 60 days.

The fine print of their filing contains the standard boilerplate, noting that they think the company is undervalued and may enter into discussions with the company.

The filing was required due to portfolio activity on July 23rd.

Per Google Finance, Sotheby's is "a global auctioneer of authenticated fine art, decorative art, and jewelry. The Company operates in three segments: Auction, Finance, and Dealer. The Company's Auction segment functions as an agent by offering works of art for sale at auction and by brokering private sales of artwork. Sotheby’s also purchases and resells works of art through its Dealer segment, conducts art-related financing activities through its Finance segment and is engaged, to a lesser extent, in brand licensing activities. The Sotheby’s name is also licensed for use in connection with the art auction business in Australia, art education services in the United States and the United Kingdom and print management services."

Mick McGuire will also be speaking at the Value Investing Congress in a few months if you want to hear his latest investment ideas.  Market Folly readers receive a discount to the event by clicking here.