Highfields Capital starts new positions 3Q 2013 (Part 1 of 6)
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 Ashland Inc. (ASH)?
Ashland, a specialty chemical solutions provider for consumer and industrial markets, reported income from continuing operations of $404 million on sales of $1.9 billion for 4Q 2013. Excluding all key items, its adjusted earnings per share were $1.54. The company said its financial performance in 4Q as well as fiscal 2013 fell short of expectations. Most of the decline in sales and profitability during the fourth quarter occurred within Ashland Specialty Ingredients. The commercial unit experienced significantly lower sales and volume for guar, intermediates, and solvents compared to a year ago. Also, it saw pricing pressure in the intermediates and solvents business as well as issues rolling out its enterprise resource planning system. It said that although 4Q 2013 was challenging for the Specialty Ingredients segment, it’s seeing improvements in customer orders for the core business in fiscal 2014. It expects better overall demand and volume in the core business, which includes coatings, personal care, and pharmaceuticals.
On the positive side, its other three commercial units reported modest volume increases during the quarter. Ashland Water Technologies continued showing sequential and year-over-year improvement. Volumes rose for the fourth consecutive quarter, driven by the pulp and paper business. Ashland Performance Materials reported higher volumes, driven by a 7% climb in adhesives and composites. Ashland Consumer Markets delivered another strong quarter with solid growth in international and Do-It-For-Me channels. The company also generated $173 million in free cash flow during the fourth quarter.
Valvoline, the world’s first lubricating motor oil, is part of Ashland’s Consumer Markets segment. Analysts have speculated about a spinoff of Valvoline into an MLP because of the division’s ability to generate cash. When asked about its plans for Valvoline, the company said it intends to keep Valvoline, as it still creates value for the company. It added that Valvoline doesn’t have the type of structure that would benefit shareholders from an MLP option.
In late July, Ashland announced that its board of directors had initiated a review of strategic options for Water Technologies. It said the review has been completed, and a formal process to sell the commercial unit is underway. The company expects the primary use of net proceeds from any sale to be returning capital to shareholders in the form of a share repurchase. According to news reports, Ashland has received PE bids for the unit.
It also announced a global restructuring program to drive growth, streamline the organization, and improve accountability. It said the restructuring is expected to generate improved business performance and annualized cost savings of $150 million to $200 million, which should better position Ashland to achieve EBITDA margins consistent with the top quartile of its specialty chemicals peer group. The program will be implemented in fiscal 2014, with full run-rate savings expected within 12 to 15 months.
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.
Browse this series on Market Realist:
- Part 2 - Highfields Capital starts new positions in ASH, NWSA, MU, and CF and sells ILMN and ORCL—13F Flash B
- Part 3 - Highfields Capital starts new positions in ASH, NWSA, MU, and CF and sells ILMN and ORCL—13F Flash C
- Part 4 - Highfields Capital starts new positions in ASH, NWSA, MU, and CF and sells ILMN and ORCL—13F Flash D