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Highbridge Capital Management 3Q 2013

Part 6
Highbridge Capital Management 3Q 2013 (Part 6 of 7)

Why did Highbridge Capital sell Cummins?

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Highbridge Capital Management, LLC is a multi-strategy alternative investment management firm founded by Glenn Russell Dubin and Henry Swieca in 1992. In late 2004, J.P. Morgan Asset Management purchased a majority interest in Highbridge, creating one of the first and most significant strategic alliances in the hedge fund industry. In July 2009, J.P. Morgan Asset Management completed its purchase of substantially all remaining shares of the firm. Highbridge and its affiliates manage approximately $29 billion in capital for many of the world’s most prominent institutional investors, public and corporate pension funds, endowments, foundations, family offices and high net worth individuals. The firm is based in New York with offices in Hong Kong and London.

The fund bought new positions in Lowe’s Cos Inc (LOW), Schlumberger Ltd (SLB), Groupon Inc (GRPN), and Tempur Sealy International Inc (TPX) in 3Q 2013. It sold its positions in Cosan Ltd (CZZ), Cummins Inc (CMI), and Tractor Supply Company (TSCO).

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).

Why sell Cummins Inc (CMI)?
Highbridge exited a 0.57% position in diesel and natural gas engine maker Cummins Inc.

Cummins reported net earnings of $362 million or $1.94 per share, below analyst estimates. Revenues were up 4% year-over-year to $4.3 billion. Revenues in North America increased by 11 percent and international revenues declined by 4 percent. Within international markets, growth in China and Brazil was offset by weaker demand in India, Australia and Europe. It said revenues were below its expectations as it continues to face an environment of weak demand for capital goods in most of its major markets. Its focus on lowering costs in all parts of our business positions it well to deliver strong earnings growth as market conditions improve.

Sales in the Engine segment declined 1% to $2.5 billion due to lower demand in stationary power, global mining and the light-duty on-highway market in the U.S., partly offset by higher demand for medium-duty truck engines in North America and Brazil. The Components segment saw 14% increase in sales to $1.1 billion due to strong on-highway demand in Europe, China and North America. Sales in the Power Generation segment reduced 13% to $712 million because of weak demand in most international markets, partially offset by higher revenues in North America. Sales in the Distribution segment was slightly up by 2% to $944 million (excluding acquisitions) on higher power generation and parts sales in North America, offset by a decline in sales in South Pacific and China.

It expects full year revenues to be down 3% compared to 2012 and EBIT to be in the range of 12.5 to 13% of sales. Previously the Company expected revenues to be flat compared to 2012 and EBIT to be in the range of 13 to 14%. It said it cut its forecast for trucks for 2013 to 223,000 units, down from its previous forecast of 229,000 units as demand for new trucks has not grown as expected in the second half of the year.

Cummins Inc. is a corporation of complementary business units that design, manufacture, distribute and service diesel and natural gas engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, (USA) Cummins currently employs approximately 46,000 people worldwide and serves customers in approximately 190 countries and territories through a network of approximately 600 company-owned and independent distributor locations and approximately 6,500 dealer locations.

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The fund started in 1992 with $35 million in capital and is named after the 19th century aqueduct that connects Washington Heights and the Bronx. It seeks to attain consistent capital appreciation primarily through arbitrage and absolute return investment strategies in the global financial markets.  The firm has evolved over the past nineteen years and developed a diversified multi-strategy investment platform comprising more than six distinct investment strategies which serve as “alpha engines”.  Some of Highbridge’s core absolute return investment strategies include Convertible Bond Arbitrage, Credit, Global Macro, Long/Short Equity and Statistical Arbitrage.

Founder Glenn Russell Dubin was born in 1957 in the Washington Heights section of upper Manhattan. He graduated in 1978 with a degree in economics from Stony Brook University and began his career in finance as a retail stock broker at E. F. Hutton & Co. in 1978.  In 2010, Dubin was instrumental in broadening the Highbridge investment platform by partnering with J.P. Morgan Asset Management to lead the acquisition of a majority interest in Gávea Investimentos, one of Brazil’s most prominent alternative investment managers. Dubin stepped down from the CEO position at Highbridge in July 2013 and continues to remain as the chairman at the firm.

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