Farallon Capital starts new positions 3Q 2013

Part 5

Farallon Capital starts new positions in MSFT, CMCSA, TWC, SPRD and sells AZO, PFE—13F Flash E

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Farallon Capital Management, LLC, is a global institutional asset management firm founded in 1986 by Thomas Steyer. It invests globally across asset classes, seeking superior risk-adjusted returns through bottom-up fundamental analysis that emphasizes capital preservation. While its investment philosophy remains consistent, its execution is flexible, allowing capital to shift among strategies, asset classes, and geographies based on prevailing opportunities. Farallon is headquartered in San Francisco and has offices in London, Singapore, Hong Kong, Tokyo, and São Paulo.

Abbreviated financial summaries and metrics for these securities are included below. Detailed analysis and recommendations require a subscription (more information at the bottom of the article).

Farallon started new positions in Microsoft Corp. (MSFT), Comcast Corp. (CMCSA), Time Warner Cable (TWC), and Spreadtrum Communications (SPRD) and it sold positions in AutoZone Inc. (AZO) and Pfizer Inc. (PFE).

Why sell AutoZone (AZO)?

The company said that while 2013 was a solid earnings year, it has been disappointed by flat same-store sales. Its same-store sales increased 1% in 4Q 2013 and missed analyst estimates. It reported net sales of $3.1 billion for its 4Q ended August 31, 2013—an increase of 12.0% from 4Q 2012. Diluted earnings per share increased 23.2% to $10.42 per share from $8.46 per share in the same quarter last year quarter.

During fiscal 2013, failure- and maintenance-related categories represented the largest portion of its sales mix, at approximately 84% of total sales, with failure-related categories remaining its strongest performers. While it has not experienced any fundamental shifts in its category sales mix compared to previous years, it experienced a slight decline in maintenance sales as a percentage of sales.

In its 10K filing, the company discussed the macroeconomic factors that have affected it sales and said that over the the past several years, various changes have occurred within the economy that affect both its customers and the industry. These changes include the recession, continued high unemployment, and other challenging economic conditions. The company believes the slowdown in maintenance-related products during fiscal 2013 was largely due to weather in various regions. Because of the unusually mild winter during fiscal 2012 across parts of the U.S., it saw a reduced benefit from sales of maintenance-related products in fiscal 2013 compared to the prior fiscal year. However, sales in the maintenance category did improve in the last quarter of fiscal 2013 due to a more normalized winter in fiscal 2013 compared to fiscal 2012.

Elaborating on the average age of vehicles as one of the factors, the company said that the average age continues to increase at a decelerated rate (primarily driven by the improvement in new car sales in recent years). However, in the near term, it expects the aging vehicle population to continue to increase as consumers keep their cars longer in an effort to save money during this uncertain economy. As the number of seven-year-old or older vehicles on the road increases, AutoZone foresees an increase in demand for its products.

Gas prices also have a real impact on its customers’ ability to maintain their vehicles. Given the unpredictability of gas prices, it can’t predict any impact on its future sales. During fiscal 2013, the average price of unleaded gasoline in the U.S. remained high, at $3.65 per gallon, compared to $3.57 per gallon during fiscal 2012. AutoZone believes gas prices will remain at overall highs, reducing its customers’ discretionary spending.

An additional macroeconomic factor is the reinstitution of payroll taxes, which has reduced take-home pay and will remain a headwind to its consumers’ spending habits.

However, management is positive about its outlook for 2014 and said it remains committed to delivering on its strategic and financial objectives. In fiscal 2014, it expects to invest in its business at an increased rate compared to fiscal 2013. Its investments are expected to be directed primarily to a new-store development program and enhancements to existing stores and infrastructure.

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Farallon

Farallon manages approximately $19 billion for institutions, including college endowments, charitable foundations, pension plans, and high–net worth individuals. According to its website, Farallon pursues multiple investment strategies on an opportunistic basis, which includes five core investment strategies: credit investments, value investments, merger arbitrage, real estate–related investments, and direct investments. Each investment is evaluated independently on a fundamental basis.

Farallon invests globally, focusing on both developed and emerging markets. It invests in public and private debt and equity securities and direct investments in private companies and real estate. It prioritizes preserving capital. While it values and employs risk management analytics, it primarily manages risk through rigorous research and analysis. It also seeks to build strong relationships with the management of the companies it invests in.

Farallon Capital Management founder Thomas Steyer attended Philips Exeter Academy and graduated from Yale University. He received his MBA from Stanford Business School, where he was an Arjay Miller Scholar. He announced in October 2012 that he would be stepping down from his position at Farallon in order to focus on political activism—in particular, advocating for alternative energy.

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