Baupost Group positions update: 3Q 2013

Part 2

Baupost Group opens PBF position, raises MU and THRX share, and sells AIG, AUY, and KGC—13F Flash B

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The Baupost Group, LLC, is a hedge fund founded and run by Seth Klarman in 1982. Its investment approach emphasizes risk management. The firm, one of the largest hedge funds in the world, is a value investing manager. It has about $30 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).

Baupost started a new position in PBF Energy (PBF), increased positions in Micron Technology Inc. (MU) and Theravance Inc. (THRX), and sold American International Group (AIG) as well as gold miners Yamana Gold Inc. (YRI) and Kinross Gold Corp. (KGC).

Why buy Micron Technology Inc. (MU)?

According to its 3Q 13F filing, Baupost has doubled its position in Micron Technology to 32% from the last quarter. Micron reported net income of $1.71 billion on net sales of $2.8 billion in 4Q 2013 compared to a net loss of $243 million on net sales of $2.0 billion in 4Q 2012. The revenues from sales of DRAM products in 4Q 2013 were 50% higher compared to 3Q 2013. This was due to a 42% increase in sales volume and a 5% increase in average selling prices. The company completed the acquisition of Elpida Memory, Inc., and Rexchip Electronics Corporation in the quarter. The results included accounting gains and operations of Elpida for August. Revenues from sales of NAND Flash products were 5% higher in 4Q 2013 compared to 3Q 2013—primarily due to a 17% increase in sales volume offset by an 11% decrease in average selling prices. The company’s solid state drive (or SSD) business is growing significantly faster than the overall SSD market. Micron-branded SSD revenue for the year was 76% over 2012.

With the inclusion of Elpida’s mobile business, revenue for the Wireless Solutions Group was up 70% quarter-over-quarter. Mobile DRAM was up 300% quarter-over-quarter, including Elpida, highlighted by increased low-power DRAM share at Tier-1 customers. Mobile DRAM margins improved significantly in Q4 on increased shipments of its 30-nanometer low-power DRAM product.

A fire in September at Korean DRAM maker SK Hynix’s Wuxi plant in China led to speculation that DRAM prices would remain high due to supply disruptions. The news favored the stock prices of Micron and peer SanDisk (SNDK). In its earnings call, Micron said it’s projecting DRAM industry supply up in the mid-20% range this year and a similar range next year. The current DRAM five-year demand CAGR is in the low
30s, implying a favorable long-term market situation there as well.

Micron CEO Mark Durcan said the company is positioned well to compete in the current favorable market environment with the successful integration of Elpida and ongoing steady development of advanced memory solutions—including its hybrid memory cube, which began sampling with key customers this quarter. Moreover, its second-generation family of PCIe enterprise SSDs recently qualified at a major OEM.

Analysts are expecting a pullback in the stock, considering it’s up over 228% year-to-date.

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Baupost founder Seth Klarman is also the author of a book on value investing titled Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor. In his book, Klarman explains the margin of safety as “buying assets at a significant discount to underlying business value, and giving preference to tangible assets over intangibles.”

Klarman is a graduate of Cornell University and Harvard Business School. Before founding Baupost, Klarman worked for Max Heine and Michael Price of the Mutual Shares fund (now part of Franklin Templeton Investments). Despite his unconventional strategies, Klarman has consistently achieved high returns. He’s a very conservative investor, and he often holds significant amounts of cash in his investment portfolios. He often makes unusual investments, buying unpopular assets while they’re undervalued, using complex derivatives, and buying put options. He’s known to keep a very low profile, but he has considerable influence. He has been called the “Oracle of Boston” and is also sometimes referred to as “the Warren Buffett of his generation.”

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