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Dan Loeb Continues to Like Sony and Campbell Soup

Daniel Loeb launched Third Point LLC in 1995. While he heads the firm's research activities, portfolio and risk management, he is also infamous for his, at times, vitriolic letters in which he criticizes company CEOs of activism targets.

Third Point just released its fourth-quarter 2019 letter. Loeb kick off the latest letter with his 2020 outlook:



"We enter 2020 with friendly monetary conditions and a benign economic backdrop that has driven the market higher in the first weeks of the year. The conditions remind us of 2016 when the PMI reaccelerated due to Chinese stimulus. This year, it is the US Fed's rate cuts that are delivering substantial easing that should boost growth. We have seen recent stabilization in manufacturing data after an earlier decline but have not yet started to see acceleration.

We are wary of many factors that can possibly upset the current goldilocks environment, chief among them the further spread of the coronavirus, derailment of further Chinese trade negotiations, a political upset from the far left in the US Presidential election, or further escalation of tensions in the Middle East."



The letter was signed on Jan. 30. We are a few days further along with the coronavirus. Government responses worldwide are impressive.

The graph of reported infections in China is not showing linear growth

The graph of reported infections outside of China flattened for a day but seems to reaccelerate again (data for Feb. 1).

The Chinese graph is somewhat encouraging. However, the Chinese government seems to be moving heaven and earth to slow it down. If that effort is required to slow it down from exponential growth, the rest of the world could still be in big trouble.

The rest of the world initially did not seem to show exponential growth rates. But because the number of reported cases is still relatively limited, those people get a lot of attention from their respective governments. They are often quarantined or very closely monitored. Under those circumstances it is hard to keep up a strong growth rate. It is important to continue to monitor the growth curve.


"Another key variable that could change the relatively sanguine environment is inflation. The data is currently telling us that inflationary pressures are muted. We do not see significant imbalances in the private sector that could trigger a recession. The Fed has said it will be patiently waiting for inflation to overshoot, which makes the current case for equities compelling, but a sudden turn in inflation could lead to a backup in rates and cause market pain."



Not just the Federal Reserve, but all three major central banks are expressing a desire for inflation. They all seem poised to deploy innovative measures. Nex, Loeb dives into specific long picks. He still holds Sony (NYSE:SNE), which is about a 1% position.


"We invested in Sony in Q1 2019 when shares traded down on market fears that cloud gaming posed a substantial threat to the company's PlayStation franchise and overall gaming business. While the market saw only risks, we saw an incredible collection of media assets: the world's largest video game platform, a top-three music label, and a top-five Hollywood film studio. Hidden behind the media empire was an underappreciated, best-in-class semiconductor business. We also saw a capable management team open to improving shareholder value and willing to listen to our suggestions about how the company could reach its full potential."



Enterprise value to Ebit and price-PFC are both around 10. Its price-earnings ratio is about 11, meaning it still a lot more attractively valued than most megacaps in the U.S.


"While business performance has been stellar, we believe true value maximization at Sony is only beginning. Out of Sony's four major non-core publicly listed stakes, the company has divested only one of its smallest, Olympus. Sony has yet to outline a clear strategy for its remaining ~$14 billion in public stakes, largely concentrated between Sony Financial and M3, but has indicated that it will do so. Sony has avoided the topic of portfolio optimization, but we continue to believe that Sony's media and semiconductors franchises can stand alone and create more value independently than together."



Corporate governance in Japan does seem to be changing for the better. For years I think it was extremely rare for management teams to start thinking in terms of value-maximizing. Loeb, for the most part (he has some concerns as well), sounds optimistic about this market.


"One of our biggest winners in Q4 and 2019 was Campbell, which gained over 6% in Q4 and 55% overall in 2019. Our initial foray into Campbell was met with skepticism, both in terms of the difficulty in effecting change in a family-controlled board and the seeming difficulty in turning around what most thought was a moribund and declining business. We saw things differently and created an opening for an attractive settlement with the board by securing support from all proxy advisory firms and building consensus among non-family shareholders around the need for change."



Loeb generated 17% last year. That's with limited net exposure, which he increased near the end of the year. He credits activism with an important part of the gains.


"The Board has been refreshed with the addition of three directors - two former packaged food CEOs and a marketing guru. The senior leadership team has been upgraded with the appointment of a new CEO and CFO. The balance sheet has been repaired with the divestiture of non-core fresh food and international snacks businesses for more than $3 billion, which reduced leverage from ~5x to 3.5x. The core business has stabilized, providing a stronger foundation on which to build. And, a compelling multi-year turnaround is now underway to return the company to sustainable sales and earnings growth."



He cut back significantly on Campbell Soup (NYSE:CPB), but it is still a 10% position in the 13-F. The valuation continues to look really rich to me. It trades at 20 times forward earnings and 15 times free cash flow. Then again that does seem to be the norm in the branded packaged goods category. The sizing of this position suggests that Loeb remains highly confident.

Disclosure: No positions.

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