Children's Investment Fund on News Corp & Disney: Q4 Letter

Christopher Cooper-Hohn's Children's Investment Fund is out with its 2012  Q4 letter and we wanted to highlight some excerpts.  One of the main takeaways here is that Porsche SE is now Children's largest holding.  The fund had a great 2012 and was up 29.52% for the year.


Children's Top 5 Holdings At 2012 Year-End

1. Porsche SE: 20.6% of Fund NAV
2. Lloyds Bank Bonds: 17.6%
3. News Corp: 15.4%
4. Japan Tobacco: 14.7%
5. Aurizon (QR National): 13.7%

Porsche shares have appreciated considerably over the past few months, but Cooper-Hohn thinks there's more room to run, with an upside of 160%.  They see 4 ways they can profit from the investment: "strong underlying performance of the investment in VW, a successful and benign resolution of the legal cases, large and increasing dividends from VW flowing through to Porsche shareholders, and the longer-term potential for a merger between Porsche and VW."


News Corp: Publishing Assets Undervalued?

Cooper-Hohn has previously talked about his News Corp position, but his latest letter breaks down how the company's spin-off of the publishing assets could come as a surprise.

While Children's has a 'pessimistic' view on print, they do acknowledge that valuation could easily double to $10 billion based on the new publishing co's assets:

" •    $0.5bn of cash: This likely be higher as the group is still considering how much cash to allocate to PubCo, but any change should be a wash with the change in the market cap.
•    $3.0bn: 50% stake in Foxtel, Australia's main pay-TV provider in a third of all homes in Australia. 14x net operating profit after tax (nopat).
•    $1.5bn stake in RealEstate.com: the listed and dominant online property listings company in Australia.
•    $1.5bn: at 10x EBIT, 14x nopat the Australian Cable Network (Fox Sports Australia) assets which account for 27% of PubCo EBIT are clearly worth a higher multiple than the publishing assets.
•    $0.7bn: listed stake in Sky Network Television, a New Zealand pay-TV operator.
•    $0.5bn: Harper Collins book publishing on 8x nopat.
•    $3.2bn: Newspapers on 8x nopat: includes DowJones, New York Post, HarperCollins, News America Marketing, Australian Publishing and UK Publishing.
•    $0.5bn: The PubCo also has NOLs and capital loss carryforwards of $1.2bn. These probably need a huge discount, but should have some value.
•    $0bn: The Education business Amplify will generate $180m of losses in 2013. These losses are capitalized in many valuation approaches. First, we think this is a credible enough investment to be valued at zero rather than negative $1.2bn (10x $120m nopat losses); News Corp will clearly argue it’s worth a considerable premium to NAV, let alone zero. Second, the company guides to a sharp narrowing in these losses over the coming years which will actually contribute strongly on a starting base $535m PubCo EBIT in 2013."

Overall though, Children's sees NWSA as a story on affiliate/re-transmission re-pricing as they focus on the Fox Entertainment Group. 


Disney: Entering a 'Multiyear Growth & Re-rating Phase'


Sticking with media, Cooper-Hohn also shared thoughts on Walt Disney (DIS).  He writes,

"We believe we are in the midst of a very long-term transfer of economics from distributors to content providers which, as we argued at our investor conference, is still in an early phase ... For the last decade, this power shift has driven consistent 8-10% pricing growth, a unique and truly giant expression of pricing power. Disney has arguably the strongest bargaining leverage of its peers and we are entering an affiliate re-pricing cycle which we think delivers some acceleration in pricing, off this extremely high base for the next 3-4 years."

He also points out how the company is finishing its massive capex at its parks and will soon begin to see margin expansion.

For more from this hedge fund, we've posted up Cooper-Hohn's presentation from the Sohn London Conference where he talked about being long News Corp and Porsche and short Fiat.  Additionally, you can view excerpts from Children's Q3 letter on Porsche and Japan Tobacco.

Chris Cooper-Hohn: Long News Corp & Porsche, Short Fiat (Sohn London Conference)

Continuing our series of notes from the Sohn London Investment Conference, next up is Chris Cooper-Hohn of Children's Investment Fund.

He advocated buying unloved stocks at the moment as companies that are perceived to be great businesses are expensive.  He quoted Warren Buffett by saying, "you pay a high price for a cheery consensus."

Cooper-Hohn presented 2 longs: News Corp (NWSA / NWS) and Porsche (GER:PAH3) and 1 short: Fiat SpA (MIL: F).


Long News Corp 

- News corp is misunderstood.  It should not be seen as a newspaper business as 73% of operating profit comes from TV content
- The price is low due to the phone hacking scandal
- It's not a cyclical business dependent on advertising revenue
- The US network has massive pricing power
- He expects EBIT to grow from $6bn to $9bn by 2015
- Share buybacks will be large
- It's cheap trading on PE 2013 10x
- The new COO Chase Carey is more shareholder friendly than the Murdoch family

News Corp announced this year that it will be splitting up its business into two segments: entertainment and publishing.


Long Porsche

- Concerns about the impact of the litigation surrounding Porsche's Volkswagen (VW) short in 2008 have depressed the price
- Hohn thinks the market has overreacted and Porsche will settle for less than is expected
- Porsche trades at a 40% discount to NAV
- It's stock has traded sideways for many years
- Porsche owns 32% of VW
- VW is also cheap so there is a double discount
- VW is perceived as a budget brand but a substantial amount of its earnings come from the premium market where there is more pricing power: Audi and Porsche
- VW and Porsche have good emerging market exposure
- VW grew its volume even during the financial crisis
- It is steadily destroying other European carmakers

Hohn belives there's 4 big ways to win by investing in Porsche:

1. VW appreciates
2. The discount to NAV narrows as the litigation is resolved
3. The discount narrows due to a higher dividend
4. A merger of Porsche and VW

We've also posted up an excerpt from Children's Q3 letter on Porsche as well.


Short Fiat SpA

- Hohn argued that Fiat was a poor company, saying it will need a capital injection soon
- Chrysler (which has been bankrupt twice) is burning cash
- If the current economic conditions continue, the burn rate will increase


For the rest of the hedge fund presentations from this event, head to notes from Sohn London Investment Conference.

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