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.

Notes From Sohn San Francisco Investment Conference 2017: Okada, McGuire & More

We've already posted up notes from the Next Wave Sohn San Francisco Conference which featured emerging managers.  Now it's time for the main event presentations which featured top hedge fund managers sharing investment ideas to benefit the Excellence In Investing For Children's Causes Foundation.


Notes From Sohn San Francisco Investment Conference 2017

Mark Okada, Highland Capital Management

Idea: Vistra (VST)

Business: Integrated IPP.  Thesis:  Strong market position in bottoming cyclical industry.  An attractive valuation, balance sheet optionality / M&A opportunity.  Lower leverage than peers.  Texas is a power island (barrier to entry) and a rapidly growing state.  Imminent supply rationalization.  Optimal capital structure of 3.5x leverage could drive 13% FCF yield.  M&A potential - lot of interest in the space from 'smart money.'

Valuation: Current share price $19, multiple ways to win and drive a higher share price



Mick McGuire, Marcato Capital Management

Idea: Deckers Brands (DECK)

Activist position that they haven't spoken about publicly before.  Own ~6% of the company, 2nd largest position in their fund.

Business:  Multi-branded footwear and apparel company.  Known primarily for the Ugg shoe brand but also own Hoka One One (cult running brand), Sanuk and Teva brands.

Activist agenda:  Focus on core Ugg brand; pursue sale or spin off of non-core brands.  Reduce costs (best in class consultants think that the cost savings opportunity is $150mm-$200mm.  Recapitalize balance sheet to 1x net debt/EBITDA.  Use proceeds of recapitalization and sale of brands to repurchase shares.  Align management comp with margin, return and TSR improvement.  Ugg has been cast as a fad but has continued to grow.  Retail expansion has hurt margins and revenue per store has continued to decline.  Margins can double from 9% to 19% with recommended strategy.

Valuation:  Opportunity to unlock value from non-core brands - $464 million with very modest topline expectations. $66 share price today - can get to $135 to $158 based on a multiple of 7.0x to 8.0x



Christopher Lord, Criterion Capital Management

Idea: MercadoLibre (MELI)

Business: largest eCommerce and payments platform in Latin America (based in Argentina).  Operates across 18 countries in largest markets in Brazil, Argentina, and Mexico.

Thesis:  Large TAM: $1.2T with long growth runway with more e-commerce adoption.  Adoption should be supported by increasing broadband penetration and smartphone penetration.  Created their own logistics marketplace to help with deliveries.  LatAm has a large emerging middle class.

Growth rates have begun to inflect.  Mobile is expanding the addressable market.  Payments is becoming important to the business - developed a proprietary payments platform similar to PayPal; increases the TAM to $1.8T; provides option value.  Have 27% share of ecommerce in LatAm - expected to increase by 2020.  Revenue growth estimates are significantly higher than consensus for 2018, 19, and 20.

Valuation:  looks conservative relative to TAM opportunity versus analogs like Alibaba.

Bonus short idea: iRobot (IRBT).  Very high share of robot vacuums but Shark will introduce its own robotic vacuum at a very competitive price.  Consensus estimates are too high given the competitive launch.



Nancy Davis, Quadratic Capital Management

Idea: shorting leveraged credit (equity tranche of CLOs)

Thesis: CLOs are popular investments among insurance companies.  Levered credit market will be the first place that will feel the brunt of monetary tightening.

Ways to play it: Short BDCs: TICC Capital (TICC) and Prospect Capital Corp (PSEC).  Valuations are way too high given where LIBOR rates are.



Glen Kacher, Light Street Capital

Idea: Delivery Hero (DHER)

Business: consists of consumer platform, tech stack to transmit orders to restaurants and delivery operations.  #1 player in 35/43 countries; several top markets: Germany, South Korea, Turkey, Saudi Arabia, Kuwait; by far the dominant player in long tail markets

Online food ordering marketplace that operates in Europe.  Marketplace model is ~90% of orders and delivery model is ~10% of orders.  Little to no capex required.  Dark kitchen model where players operate food operations in competitors like SpoonRocket, Sprig, and Munchery has struggled; better business is the delivery and platform for existing restaurants.

Thesis: TAM of 72bn Euros across all markets where online delivery is underpenetrated.  Pricing power to raise prices because they provide value ot restaurant customers.  Expect EBITDA margins to scale significantly.  Multiple ways to win (increase in food delivery TAM, increase in online penetration, increase in market share, delivery hero take rate, LT EBITDA margin.

Valuation: Implied share price of 76 Euros based on the 20x EV/EBITDA multiple, 127% upside to current



Carl Kawaja, Capital Group

Idea: Sony (SNE)

Return of the Daikaiju

Thesis: New management is changing the culture.  Content is king - Sony's presence is underappreciated and the business is under earning.  Gaming, image sensors, music are the businesses that are very valuable; they comprise 2/3 of operating income and 1/3 of revenue.

Gaming: business is large and is evolving to a recurring revenue stream model where you pay a monthly subscription fees supplemented by in-game purchases.  Additionally, they have had some success in mobile games, have the #2 selling mobile game.  Transition to digital game downloads should lift margins.

Sensors:  Photo and video is the future of social interaction so images will continue to be an important business.  Sony's image sensors are critical for digital camera option.  Hal of all CMOS image sensors are Sony; 100% share of iPhone 7 and 8.  Profitability has been deperessed.

Music:  ~92 million paid music subscriptions globally.  #1 music publisher globally with 30% share and #2 record label.  Streaming is now 60% of digital revenues.  Digital music is more profitable than physical music.

Valuation:  Expect 50% upside based on sum of the parts valuation



Oleg Nodelman, EcoR1 Capital

Idea: Ironwood Pharmaceuticals (IRWD)

Business: Biotech company whose primary drug is Linzess - drug for Irritable Bowel Syndrome Constipation (IBSC); marketed by Allergan.

Thesis: Addressable market of 40mm Americans.  Linzess has safety and efficacy superior to competitive drugs.  Management with a long term focus.  Option value with another 7 drugs in the pipeline - current price gives no value to these R&D efforts.

Valuation: $16 per share price but intrinsic value is as high as $43 per share.  Adding in total pipeline value could increase value of $200/share.  Trades at a discount to peers in the space at 9.6x EV/Revenue.




Dan Morehead, Pantera Capital

Idea: Cryptocurrency

Bitcoin is a digital currency protocol similar to TCP/IP for the internet.  Blockchain is a serial killer (better than a category killer).  Fiat currencies are poor stores of value - even the dollar has still lost over 90% of its purchasing power since 1950.

Huge addressable market of the industries that Bitcoin could disrupt.  The protocol layer (Bitcoin) captures most of the value in crypto currency versus the internet where the application that is built on the protocol layer captures most of the value.

Two potential ideas: Kik will be the first major company to tokenize their entire cap table.  Funfair is a fast, fair secular online casino; Funfair aims to cut out the middleman.



Be sure to also check out the pitches from emerging managers via our notes from the Next Wave Sohn San Francisco Conference 2017 as well.

Third Point's Q3 Letter: Long Amgen, eBay & Alibaba, Exited Sony

Dan Loeb's hedge fund firm Third Point is out with its third quarter letter.  In it, the firm reveals that they've added to their stake in Amgen (AMGN), established a sizable new position in eBay (EBAY), and have a significant direct investment in the newly public Alibaba (BABA). 

Additionally, they've exited their long of Sony.  They also reduced or exited positions in AIG, Hertz, Softbank, LNG.

Then, with the recent market volatility, they lifted some hedges and added back to positions that they had previously sold at higher levels.  Third Point writes, "Although consensus has shifted to lower growth, slower inflation, modest rates, and continued monetary expansion, we think the markets will resume an overall upward trajectory in the US through year-end."

Embedded below is Third Point's Q3 letter where they specifically talk about AMGN, EBAY, BABA and SNE:



You can download a .pdf copy here.

What We're Reading ~ Analytical Links 3/12/14

On UnionPay, China and smuggling money in Macau [Thomson Reuters]

Google's Eric Schmidt on the future of internet freedom [NYTimes]

IPOs: when stability creates instability [Pragmatic Capitalism]

Fannie Mae/Freddie Mac would be eliminated in Senate Bill [BusinessWeek]

The 'easy money' myth [Reformed Broker]

Media industry lists things that worry them about TWC/Comcast merger [WSJ]

Are malls over? [The New Yorker]

The future of TV is coming into focus and looks pretty great [Quartz]

Barely keeping up in TV's new golden age [NYTimes]

Mexico seeks telco and TV competition [Advanced Television]

Big batteries threaten big power stations and utilities' profits [Economist]

Kate Spade (KATE) faces uphill fight to be next Ralph Lauren [Bloomberg]

Smartphone payment system to be unveiled in UK [FT]

The gaming console market is in crisis [TechCrunch]

Google looking to keep its search engine relevant in age of apps [WSJ]

The future of wearable technology [SlideShare]

Alibaba to buy control of ChinaVision [Reuters]

Third Point Q4 Letter: New Positions in Dow Chemical & T-Mobile

Dan Loeb's Third Point Offshore Fund is out with its fourth quarter 2013 letter.  In it, they reveal performance of 25.2% for the year.

Third Point's Q4 letter outlines their thesis on Dow Chemical (DOW), now their largest position.  They want the company to look into potentially spinning off its petrochemical business and to return capital to shareholders via buyback.

They also detail their thoughts on Ally Financial, a position they've been involved with since 2011 via various plays in the capital structure.  They look for the company to complete an IPO after undergoing a massive restructuring.

Lastly, the hedge fund highlights their thesis on Softbank, Sony (SNE) and T-Mobile (TMUS).  The latter is a brand new position they established during the company's secondary offering at $25 in November.

Embedded below is Third Point's year-end investor letter:




For more on this hedgie, we've also highlighted Third Point's other activity here.

What We're Reading ~ Hedge Fund Links 8/2/13

Soros said to have taken stake in Herbalife (HLF) [Bloomberg]

9 insights from George Soros [StockTwits50]

Tiger Global preps long-only launch [II Alpha]

Jim Chanos and the commodities supercycle [Institutional Investor]

Profile of Glenview's Larry Robbins [Barrons]

Pershing Square tax lien offers peek into strategy [Reuters]

The new hot hedge fund trade: Detroit bonds [Hartford Business]

A hedge fund aptitude test [HF]

Hating on hedge fund fees is bad for your retirement [HF Intelligence]

Why Loeb's Yahoo stock sale means nothing to shareholders [Forbes]

Pershing Square raises questions regarding Herbalife's earnings [PRNewswire]

Fidelity Contrafund sours on Apple, bolsters Tesla bet [Reuters]

George Clooney lashes out at Dan Loeb over Sony [Deadline]

CEO of Overstock.com took out a full page ad mocking Steve Cohen [BusinessInsider]

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.

Dan Loeb's 2nd Letter to Sony, Pushing For Spin-Off Again

Dan Loeb's hedge fund firm Third Point has been pushing for a partial spin-off of Sony's (SNE) entertainment division.  Loeb initially hand-delivered a letter to Sony's management team, outlining his plan for the company.

Loeb has since increased his position in Sony to around 7% of the company and sent another letter to Sony's CEO which we've posted below via WSJ:

"Mr. Kazuo Hirai
President and CEO
Sony Corporation
7-1, Konan 1-Chome, Minato-ku,
Tokyo 108-0075 Japan 

Dear Mr. Hirai: 

Sony Corporation (“Sony” or “the Company”) appears to be regaining its competitive edge. Recent highlights include the debut of PlayStation 4 with its consumer-friendly approach to next-generation gaming and Xperia, which recently overtook Apple as the #1 smartphone in Japan. We expect the upcoming Xperia Z Ultra to generate similar success in Europe and were pleased to see Vodafone VOD.LN +0.90%’s CEO using an Xperia Z in a recent meeting. 

As a sign of our increased confidence in the Company’s direction under your leadership, funds managed by Third Point LLC (“Third Point”) have increased their stake in Sony to 70 million shares valued at ¥136.5 billion ($1.4 billion), held via 46 million shares of ordinary stock valued at ¥89.7 billion ($944 million) and economic exposure to 24 million shares valued at ¥46.8 billion ($492 million) through cash-settled swaps. Given our large stake, we reiterate our offer to serve on Sony’s Board of Directors. 

Another sign of progress is the news that the Company has retained financial advisors to help evaluate our proposal to publicly list a minority stake in Sony Entertainment (“Entertainment”) through a rights offering backstopped by Third Point. We remain convinced that the proposed transaction will strengthen the Company as a whole. The newly-listed entity will thrive with a governance structure which focuses on increasing profitability, competitiveness and accountability. We expect that this transaction will strengthen rather than diminish Sony’s ability to exploit meaningful synergies between the Entertainment and Electronics divisions, a goal we share. 

Our proposal is a simple one: it contemplates a semi-independent governance structure. We believe that you, Mr. Hirai, should serve as Chairman of both Boards, to promote synergies between Entertainment and Sony Corporation. Entertainment’s dedicated Board should be composed of diverse individuals with deep knowledge of media, entertainment and digital technology, who value creative talent and can institute best practices of governance. Today, Entertainment is a sleeping giant — a multi-platform content business with a global footprint, encompassing leading film and television production, cable networks and music interests. An incredible opportunity exists to integrate Entertainment’s components to create a dominant creative platform for today’s artist-entrepreneurs – but the right leadership at the Board level is imperative. 

An independent Entertainment Board will go a step further: holding management accountable by establishing goals for growth while setting compensation tied to value creation using stock and options. It can also help determine important capital allocation decisions, ensuring that Entertainment’s robust cash flow is used efficiently. A capital shortfall has prevented Sony from taking advantage of attractive acquisition opportunities; instead, the Company has resorted to joint ventures and costly loans to engage in strategic transactions like those in music publishing (i.e. EMI). Our research has confirmed media reports depicting Entertainment as lacking the discipline and accountability that exist at many of its competitors. In light of this track record, it seems difficult to argue that Entertainment would not be strengthened by the transparency that comes with public reporting, an active media analyst community evaluating financial performance regularly, and an expert Board with strongly aligned incentives. 

We understand past Sony management teams have considered a complete spin-off of Entertainment, but concluded that the potential for synergies outweighed the obvious value that would result. We respectfully disagree with any suggestion that listing a minority stake in the Entertainment division would curtail opportunities for cooperation. While we trust management’s judgment that this theoretical opportunity is ripe, it remains an unfulfilled aspiration twenty-four years after the acquisition of Columbia Pictures. Shareholders should not have to wait any longer. We support efforts to create an integrated Sony ecosystem but must not forget that today the Company’s most valuable untapped synergies lie within Entertainment itself. 

While the transaction we have proposed is not a panacea, it will provide a necessary organizational apparatus to streamline an overly cumbersome corporate structure and allow each company to focus on its strengths without sacrificing potential alliances. We encourage management and the newly-appointed Board members to maintain the brisk pace of change you have recommended. Indeed, Sony has an opportunity to serve as a shining example of how structural reforms, the “Third Arrow” of Prime Minister Abe’s economic plan, can be implemented successfully through constructive shareholder engagement. 

Although we have not yet been asked to discuss our ideas with the Company’s investment bankers or Board, we would like to do so promptly. We hope that after seriously considering the merits of our proposal, Sony’s Board will share the enthusiasm that other shareholders have resoundingly expressed for it. We can think of no better opportunity for you and the Board to demonstrate real commitment to your declaration that “Sony Must Change.” 

Sincerely, 

Daniel S. Loeb
Chief Executive Officer"


For more on this hedge fund, we posted up Third Point's latest exposure report.

What We're Reading ~ Hedge Fund Links 6/14/13

No wind in sails of long/short equity [AllAboutAlpha]

Paulson gold fund down 54% this year [FINalternatives]

Why George Soros likes Japan [WealhDaily]

Hedge fund liquidations slow, fees weaken in Q1 [Boston Biz Journal]

Hedge fund marketing: 3 must know rules [ValueWalk]

Rival hedge funds hope to feast on SAC Capital redemptions [Reuters]

Goldman Sachs tops prime brokerage ranking [HFIntelligence]

Demand for alternative assets grows among investors [FT]

Risk, returns & regulation big topics at the EuroHedge summit [HFIntelligence]

Little reason for lack of transparency in hedge funds [FTAdviser]

Charting hedge funds' long term gains [WSJ]

Sony holdings blurred by Third Point swaps [Bloomberg]

Analyzing Dan Loeb's stock picks [Old School Value]

Institutions take divergent paths in revamping hedge fund portfolios [P&I]

Fund of hedge funds fight for survival [FT]

TiVo bump shows how hedge fund lawyers gain edge in court [Bloomberg]

Third Point Increases Asian Exposure (Via Sony): May Exposure Report

Dan Loeb's Third Point Offshore Fund just released its May exposure report.  In it, we see that Third Point was up 3.6% in May and is up 14.7% year-to-date.


Net Long Exposures

In terms of exposure in equities, Third Point was 70% long, -22.5% short, leaving them 47.5% net long equities at the end of May.  This is only a slight increase from April when they were 45.4% net long.

In credit, Third Point was 32.3% net long at the end of May.


Increased Asian Exposure

Geographically speaking, they're 60% net long the Americas region, 8% net long EMEA, and 15% net long Asia.

This marks a sizable difference in their net long positioning in Asia as they are now 15% net long, compared to only 6% net long the month prior. 

This is mostly attributable to their new Sony (SNE) long position.  Loeb is trying to engineer an activist campaign at the company and is pushing for Sony to spin off their entertainment group.  Though it should also be mentioned that Third Point slightly reduced short exposure in the region as well.

Embedded below is Third Point's May exposure report:





Third Point Revealing Less Information

Unfortunately, Third Point has made a change to their monthly exposure report, and they are no longer disclosing their top positions, top winners, or top losers for the month. 

As such, we'll have to rely solely on SEC filings, investor letters, and conference appearances going forward.  If you want to see what US stocks Third Point is investing in, head to our Hedge Fund Wisdom newsletter as we cover it there.

To see the April version of their exposure report that revealed much more portfolio information, head to our post here.   You can also view Third Point's Q1 letter.