Dan Loeb's Activist Investments Not Yet Seeing Strong Gains
- By Holly LaFon
Daniel Loeb (Trades, Portfolio) aggressively pursues his strategies at his activist investments, but he still has some distance to go on his major targets to see a substantial return on his investment. Three companies the Third Point investor has his sights set on this year are: Nestle, United Technologies (UTX) and Campbell Soup Company (CPB).
Warning! GuruFocus has detected 4 Warning Sign with BRK.A. Click here to check it out.
The intrinsic value of OTCPK:NSRGY
Nestle (NSRGY)
Loeb announced that it purchased a stake in Switzerland-based food and drink company Nestle (NSRGY) in June 2017. The stake, worth $3.4 billion at the time, represented around 1% of the company's outstanding shares.
At the time of investment, Loeb called on the company to take four actions: target a specific margin goal, return more money to shareholders through increased leverage, "reshape the portfolio" and sell its stake in L'Oreal.
Nestle's management has over the past year worked toward some of Loeb's goals. In a letter in July, it confirmed that it was on track to meet the margin target it had set in September of 17.5% to 18.5% by 2020. The margin represented an increase from 16.0% in 2016. On the second point, it moved in June 2017 to add CHF 20 billion to its available funds for share buybacks and mergers spread evenly over the upcoming three years. In 2017, it returned CHF 10 billion in share repurchases and dividends, and raised its dividend for the 23rd consecutive year.
Management has made progress on portfolio reshaping through divesting and shopping some of its assets, as well as acquiring others. To rearrange its nutritional and wellness focus, it acquired nutritional health products company Atrium Innovations in December and this week said put up for sale its Nestle Skin Health business. In 2018, it sold its Gerber Life Insurance business and its U.S. confectionary business.
Nestle continues to hold a 23.29% stake in cosmetics maker L'Oreal. The company has given no updates about its intentions with L'Oreal despite Third Point posting a 34-page presentation in July reiterating Loeb's demand that it divest a large portion of the stake.
At the same time, Loeb made clear he was unhappy with the company's rate of change, demanding it divide into three business units and overhaul its board of directors in addition to his L'Oreal pressure.
"This is a call for urgency - rather than incrementalism," said Loeb's letter.
Shares of Nestle have declined about 1% since Loeb announced his stake.
United Technologies (UTX)
Loeb owned a 7.6 million-share stake in industrial conglomerate United Technologies, representing about 6.6% of the company, at the end of the second quarter. According to a first-quarter letter, Loeb started the position in the fourth quarter of 2017.
"UTC fits a pattern of many underperforming conglomerates where value is diminished by the ill effects of a 'one size fits all' approach to corporate strategy, incentive compensation and capital allocation," Loeb wrote in the letter.
He blamed its record on poor management execution, losses in market share and "underinvestment in key areas." To put it back on track, he urged the company to divide into three companies: Otis elevators, Controls and Security, and an aerospace company formed by its Aerospace Systems unit and Pratt & Whitney. Although Loeb said he disclosed his recommendations in a letter to the company's board, the company did not publicly respond and has not split up.
It did report a 9% increase in second quarter revenue versus the prior year, reporting $16.7 billion in its fourth straight year of revenue growth above 5%. Earnings per share also rose 42% to $2.56 for the quarter. The strong performance prompted United Technologies to raise its sales guidance for the full year 2018 to a range of $63.5 billion to $64.5 billion, from a previously expected range of $63 billion to $64.5 billion.
From the fourth quarter average share price of $121 to Tuesday's closing price of $139.71, United Technologies has gained 15.5%.
Campbell Soup Company (CPB)
Shares of Campbell Soup, Loeb's latest investment, popped when news broke that Loeb was buying the stock and gearing up for an activist investment on Aug. 1. Since then, he has disclosed a stake of 17 million shares, or around 5.65% of the company. In a filing disclosing the stake on Aug. 9, Loeb decried what he saw as the company's poor operating performance, "ill-advised" acquisitions and stock price at the same level it was in 1996.
The company responded to reports Loeb's demand for a sale by reiterating its May 18 statement that it was undertaking a "board-led comprehensive strategy and portfolio review" with results due on Aug. 30. On that date, Campbell's announced it planned to organize the company into two businesses, Campbell Snacks and Campbell Meals and Beverages. In addition, it said it would look at selling non-core businesses, using proceeds to pay down debt, and increase its cost savings target to $945 million by fiscal year 2022.
Unimpressed, Loeb responded on Sept. 7 by submitting a list of 12 board director candidates to put up for election at the company's 2018 annual meeting of shareholders. The last meeting of shareholders took place in November 2017.
Loeb's entrance on the Campbell Soup scene comes as the company has faced lower annual revenue since 2014. In the fourth quarter, while net sales increased 33% due to acquisition of Snyder's-Lance and Pacific Foods, organic sales again slid 3%. Meanwhile, gross margins fell to 29.2% from 35.9% in the year-ago quarter.
Campbell Soup shares closed at $38.98 on Wednesday, down about 2.5% from Loeb's average purchase price of $40.38.
See Daniel Loeb (Trades, Portfolio)'s portfolio here.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 4 Warning Sign with BRK.A. Click here to check it out.
The intrinsic value of OTCPK:NSRGY
