Highfields Capital starts new positions in ASH, NWSA, MU, and CF and sells ILMN and ORCL—13F Flash B
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Highfields Capital Management, LP, founded in 1998 and based in Boston, Massachusetts, is a privately owned value-oriented investment management firm. It was founded by Jonathon Jacobson and Richard Grubman. It provides its services to endowments, charitable and philanthropic foundations, pension funds, and other institutional and private investors. Highfields’ investment funds have over $13 billion in net capital invested worldwide in public and private companies across a wide variety of industries and security types. Its mission is to provide its limited partners superior long-term risk-adjusted returns in order to further many of their own good works in areas like education, medical research, the arts, and philanthropy.
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).
Highfields Capital Management started positions in Ashland Inc. (ASH), News Corp. (NWSA), Micron Technology Inc. (MU), and CF Industries Holdings (CF) and it sold Illumina Inc. (ILMN) and Oracle Corp. (ORCL).
Why buy News Corp. (NWSA)?
News Corporation saw its share decline following its earnings announcement for 1Q 2014, as revenue fell 3% to $2.07 billion, missing analyst estimates. The company attributed the decrease to lower advertising revenues at the News and Information Services segment, foreign exchange fluctuations, and the sale of the Dow Jones Local Media Group. The group saw a 22% decline in revenue for its Australian newspaper business. However, it said the decline was partially offset by the inclusion of FOX SPORTS Australia, which News Corp. began consolidating in November 2012 following the Consolidated Media Holdings (CMH) acquisition, and continued strength in the Digital Real Estate Services segment. Revenue from the book publishing segment declined 7%, to $24 million, but ebook sales improved by over 30% versus the prior year and represented 22% of revenues—up from 15% in the prior year.
On June 28, News Corporation announced it has separated its businesses into 21st Century Fox (FOX), which owns the entertainment business, and News Corp. (NWSA), which owns the publishing business. The new News Corp. comprises the network of brands in news and information services, sports programming in Australia, digital real estate services, book publishing, digital education, and pay-TV distribution in Australia. The company had said the new structure would simplify operations and greater align strategic priorities and enhance overall shareholder value. Analysts have speculated that the publishing businesses were separated because they was underperforming compared to the pay-TV business. They added that News Corp. also wanted to contain the damage caused by the phone hacking scandal that led to the closure of the UK newspaper News of the World.
For the fiscal year ended June 30, 2013, the company posted a 3% increase in revenue, to $8.9 billion. It recorded a net income of $506 million for the fiscal year ended June 30, 2013, compared to a net loss of $2.1 billion in fiscal 2012—primarily due to the gain on the CMH transaction of $1.3 billion, the gain on the sale of the investment in SKY Network Television Ltd. of $321 million, and lower impairment and restructuring charges in fiscal 2013 of $1 billion.
The company is pursuing a strategy to improve its revenue prospects by being cost-conscious and transforming its publishing operations longer-term into multi-platform businesses. It plans to depend less on advertising, focus much more on subscription, and take advantage of mobile as a platform. It has set up a global advertising exchange to sell ad space in its 50 leading websites and mobile products and will discontinue any remaining arrangements with third-party ad networks. In 1Q 2014, it sold Dow Jones Local Media Group and its Live Event business at HarperCollins, which were considered non-core. It said it expects fiscal ’14 to be a transition year, when it balances ongoing operational efficiencies with prudent investments and focuses on stabilizing top-line performance.
Highfields founder Jonathon Jacobson is an undergraduate alumnus of the Wharton School in finance. He has an MBA from Harvard Business School. After working as an options trader and at Merrill Lynch and Lehman Brothers, he started a successful stint at Harvard Management Company in 1990. In 1998, Jacobson left HMC to co-found Highfields, with a third of the fund’s initial $1.5 billion under management coming from HMC. Grubman retired in August 2010.
According to Jacobson, it’s very difficult to find a good company trading at a cheap price despite having a hedge fund research team. So he claims that Highfields does end up evaluating unattractive businesses with low valuations whose poor performance the Street expects to continue. Companies whose price is low, and that are overcoming issues, might be considered a buy.