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Highfields Capital starts new positions in ASH, NWSA, MU, and CF and sells ILMN and ORCL—13F Flash E

Smita Nair

Highfields Capital starts new positions 3Q 2013 (Part 5 of 6)

(Continued from Part 4)

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 sell Illumina Inc. (ILMN)?

Illumina, Inc., posted a 25% increase in revenue to $357 million for 3Q 2013, compared to $286 million in 3Q 2012 due to positive underlying trends across all geographies and most product lines. While many of its customers receive funding from government agencies to purchase its products or services, Illumina is lessening its dependency on government funding. In Q3 2013, approximately 45% of its total revenue came from applied market customers—including customers in the clinical, consumer, translational, and agricultural segments who don’t rely on government agencies for funding. The company’s strategy is to diversify its customer base in order to increase further the portion of its revenue from applied market customers over time.

Consumables revenue increased $38.9 million, or 22%, to $215.6 million in 3Q 2013, compared to $176.7 million in the prior year. The increase was primarily attributable to increased sales of sequencing consumables, driven by growth in the installed base for both HiSeq and MiSeq systems, as well as higher consumable sales per HiSeq instruments in the installed base. Instrument revenue increased $17.3 million, or 21%, to $99.7 million in 3Q 2013, compared to $82.4 million in the prior year. This rise was driven primarily by an increase in HiSeq and MiSeq shipments.

For fiscal 2013, the company is now projecting approximately 22% revenue growth and non-GAAP earnings per fully diluted share of $1.75 to $1.77, including the impact of the Verinata and Advanced Liquid Logic acquisitions. The company recently signed an agreement  to acquire the Santa Clara–based NextBio, a leader in clinical and genomic informatics. The stock is up 77% year-to-date.

Illumina Inc. is a leading developer, manufacturer, and marketer of life science tools and integrated systems for the analysis of genetic variation and function. Using its proprietary technologies, it provides a comprehensive line of genetic analysis solutions, with products and services that address a broad range of highly interconnected markets, including sequencing, genotyping, gene expression, and genomic-based diagnostics. Its customers include leading genomic research centers, academic institutions, government laboratories, clinical research organizations, and in vitro fertilization clinics, as well as pharmaceutical, biotechnology, agri-genomics, and consumer genomics companies.

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.

Continue to Part 6

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