Appaloosa Management starts new positions 3Q 2013

Part 2
Appaloosa Management starts new positions 3Q 2013 (Part 2 of 6)

Appaloosa Management starts new positions in FCX, INGR, CYH, THC and sells MSFT, CMCSA—13F Flash B

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Appaloosa Management is a hedge fund founded in 1993 by David Tepper and Jack Walton. It’s based in Short Hills, New Jersey. Appaloosa Management invests in public equity and fixed-income markets around the world. It has about $20 billion in assets under management.

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).

In this six-part series, we’ll go through some of the main positions Appaloosa Management traded this past quarter.

Appaloosa started new positions in Freeport-McMoRan Copper & Gold (FCX), Ingredion Inc. (INGR), Community Health Systems Inc. (CYH), and Tenet Healthcare Corp. (THC) and it sold Comcast Corp. (CMCSA) and Microsoft (MSFT).

Why buy Ingredion Inc. (INGR)?

Ingredion, formerly Corn Products International (CPO), reported a 24% decline in EPS to $1.10 from $1.45 reported in third quarter 2012. Sales were down 4%, as volume declines and currency devaluations more than offset price mix improvements. Ilene Gordon, chairman, president, and chief executive officer, said the quarter was disappointing because many of the headwinds the company faced in the second quarter persisted and, in some cases, accelerated. These challenges included volume softness, currency headwinds, and higher costs. She added that two-thirds of the decline in operating income in the quarter were a result of challenges in South America, particularly Argentina. Conditions remain very challenging in Argentina, as political and economic actions have significantly increased costs while the company’s ability to price through higher costs remains constrained. In Argentina, high corn prices and low sugar prices led to consumers switching to sugar in lieu of HFCS (high-fructose corn syrup). The company’s North American business faced headwinds in the form of a historically bad drought in 2012, extremely low sugar prices, and a weak consumer environment. However, it said the total business held up well despite the economic challenges.

In terms of outlook for full-year 2013, the company narrowed it EPS guidance to the range of $5.00 to $5.15. This reflects the disappointing third quarter results in South America. It expects net sales in North America to decline between 3% and 4% on continued volume softness and the impact of lower corn costs on grain-related customer contracts. On the positive side, volume softness is expected to abate, as the economy in North America is showing signs of recovery. This should drive overall consumer demand. Also, the price relationship between corn and sugar in Argentina is expected to normalize, which will make the company’s sweetener prices more attractive going forward. It’s already starting to see modest volume growth in Brazil across many consumer end markets. It expects a positive outlook based on relief on raw material prices, improved volume performance, and sales and operating income from key capital investments.

Ingredion is a global ingredients solutions provider specializing in nature-based sweeteners, starches, and nutrition ingredients. With customers in more than 40 countries, Ingredion serves approximately 60 diverse sectors in food, beverage, brewing, pharmaceuticals, and other industries.

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Appaloosa invests in the global public equity and fixed income markets with a focus on equities and debt of distressed companies, bonds, exchange warrants, options, futures, notes, and junk bonds. According to Bloomberg Businessweek, the firm’s client base consists of high–net worth individuals, pension and profit sharing plans, corporations, foreign governments, foundations, universities, and other organizations. Investors commit to a locked period of three years during which their withdrawals are limited to 25% of their total investment.

Appaloosa founder David Tepper’s investment specialty is distressed companies. While most hedge funds underperformed the U.S. stock market in 2012, Tepper’s flagship hedge fund successfully bet on stocks and other securities at key moments in 2012, posting a net return of nearly 30%. In recent years, he’s become known as a philanthropist. His largest gift of $67 million went to Carnegie Mellon University in 2013, whose Tepper School of Business is named after him. He earned his BA in Economics from the University of Pittsburgh in 1978 and his MBA (then known as an MSIA) from Carnegie Mellon in 1982.

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