Hedge Fund Glenview Capital’s Larry Robbins Keeps Buying MCK, LH, TYC, GR, CLWR
Larry Robins is proud that his firm can “continue to generate attractive risk adjusted returns”. Although he “remains constructive on the investment environment over the medium term supported by attractive valuations, excessive corporate liquidity and a growing economy”, Robbins broadened his short positions in REIS, cruise lines and other travel related equities, companies that derive a significant portion of their revenue from government and healthcare.
Glenview Capital manages about $7 billion, which is split between Glenview Funds, a short fund, and Little Arbor Funds, a multi-strategy fund. Robbins makes his returns making concentrated bets on large cap stocks. In addition, Robbins has been known to take a more activist approach to some of his large bets, voicing concerns about what management is doing and publicly demanding change.
These are the highlights from his latest shareholder letters on some of his high convicted positions: McKesson, HMOs, Laboratory Corp (LH), Goodrich (GR) and Clearwire (CLWR). He has been adding to all these positions over the past quarters.
Growth on Growth: McKesson (MCK)
Larry Robbins liked the growth of the profit margin of the growing drug distribution business. “Drug distribution is a good business. It generally grows top line about mid-single digits and earnings and value pershare at a low to mid-teens rate after margin expansion and the productive use of free cash flow. There’s nothingwrong with that at all – over the long-term such a rate of return will be greater than average” He wrote.
His investing thesis in McKesson is more macroeconomic oriented. “In the case of Pharmaceutical Services, history may in fact repeat itself. In the coming three years, the industry willbenefit both from a second wave of generics, as shown in the following chart, as well as a volume uplift driven byfederal healthcare policy, this time in 2014 driven by the universal healthcare coverage aspects of the recenthealthcare reform legislation.”
This is the holding history of Larry Robbins with McKesson. He owned from 2006 to 2008. Sold out in fourth quarter of 2008, he bought back a year later, and has been adding to the position. He was up about 30% with the position. This is the holding history.
Law of Accelerating Marginal Returns: Laboratory Corporation (LH)
Larry Robbins added significantly to his position in Laboratory Corp (LH). He owns more than 1 million shares, valued at $90 million, and accounted for 1.5% of Robbins’ portfolio.
Laboratory Corporation of America Holdings, is one of the largest independent clinical laboratory company's in the United States. Laboratory Corp. Of Amer. has a market cap of $8.96 billion; its shares were traded at around $89.59 with a P/E ratio of 15.8 and P/S ratio of 1.8. Laboratory Corp. Of Amer. had an annual average earnings growth of 15.8% over the past 10 years. GuruFocus rated Laboratory Corp. Of Amer. the business predictability rank of 5-star
His rational: “The base business of lab testing produces a reasonably attractive and defensive economic waterfall: low tomid-single digit revenue growth driven by modest growth in both volume and price leads to mid-highsingle digit operating growth and low-teens earnings per share growth after capital deployment… At a valuation of 11.5x 2012 cash earnings (earnings excluding goodwill amortization) we believe there issignificant room for both earnings growth and multiple expansion over the intermediate term.”
GuruFocus’ DCF calculation of Laboratory Corp gives an intrinsic value estimate of $89, which is about even with the stock price. The DCF calculation ignored the intangible asset Laboratory Corp has, which may underestimate the company’s value. Overall, DCF calculation of predictable companies can give a reasonable estimate of the value.
Time Arbitrage – Getting Paid to Wait: Goodrich (GR)
Goodrich Corporation is a global supplier of systems and services to aerospace, defense and homeland security markets. Goodrich Corp. has a market cap of $10.61 billion; its shares were traded at around $84.74 with a P/E ratio of 18.9 and P/S ratio of 1.5. The dividend yield of Goodrich Corp. stocks is 1.4%. Goodrich Corp. had an annual average earnings growth of 11.8% over the past 10 years.
“In the investment world, the returns are what matters, and you don’t get any bonus points for having taken on more risk along the way. As such, we are all in search of the lowest risk situations at any point on the return spectrum… On the long side, many of our healthcare investments harnessed demographic trends and regulatory outcomes that were a certainty with the passage of time. Additionally, purchasing hard assets like power plants and cell phone towers in the 2002 distressed cycle simply required some patience so that time could pass, allowing demand to grow into fixed supply.”
“As you can imagine, the market for new aircraft is cyclical and lumpy, with boom / bust periods of approximatelyseven years. The last major capital deployment in global aircraft began in the mid 2000s. This build cycle broughtdown the average age of GR’s installed base, and in the economic downturn two years ago, GR had headwinds fromboth new equipment sales and also a fleet getting younger, which put downward pressure on aftermarket mix.Specific to engine encasements, mandatory maintenance occurs after approximately seven to ten years, meaning thatwe now are entering the echo effect of the mid 2000s capex acceleration. As we are 100% confident that theseplanes will get older, this provides a secular tailwind for GR revenue and profits. When combined with the long-term 5% growth in global plane capacity and the likelihood of an acceleration in capacity in the intermediate term,Goodrich is likely to go from dual headwinds to dual tailwinds from 2009 through 2014, with the aftermarkettailwind of high certainty.Our long-cycle earnings waterfall is 17% annual growth for Goodrich, driven by 5% global capacity growth, 3%additional Goodrich content per plane, margin expansion from positive aftermarket mix and productive deploymentof free cash flow. Over the coming years, we expect several of these factors to be above average, with a resumptionin fleet growth, the aftermarket echo effect described above, and a relevering of the balance sheet from presently0.7x towards their long-term target of 2.5x debt / EBITDA. At 12x 2012 earnings, we believe that Goodrich’searnings acceleration is worth waiting for”
This is the holding history of Larry Robbins with Goodrich. He has been adding to the position over the past three quarters, as the stock price appreciated by about 20%. As he pointed out, it pays to be patient.
Tyco International (TYC)
Tyco international is another company that Larry Robbins keeps buying. Tyco International Ltd. provides security products and services, fire protection and detection products and services, valves and controls, and other industrial products to customers worldwide. Tyco International Ltd. Switzerland has a market cap of $21.06 billion; its shares were traded at around $44.45 with a P/E ratio of 15.9 and P/S ratio of 1.2. The dividend yield of Tyco International Ltd. Switzerland stocks is 2.1%
“Very quietly over the past seven years, Ed Breen and a new management team at Tyco have been dealing with theaftermath and creating quite an attractive company, and return for shareholders. Tyco rationalized its businessportfolio, spun off Covidien in 2007, revitalized its balance sheet, improved its operating focus and re-domiciled thecompany in Switzerland to solidify the sustainability of its low corporate tax rate. Fourteen years after the initialADT conversion, Tyco is recording a GAAP tax rate of 18% with opportunities to drive it still lower… At 11x our 2012 earnings estimate, we believe Tyco shares will appreciate meaningfully over the medium term,driven by continued earnings growth and modest multiple expansion.”
This is the holding history of Larry Robbins with Tyco.
Capex Behind You, Growth In Front of You: Clearwire (CLWR)
Clearwire is a provider of simple, portable and reliable wireless high-speed Internet service. Clearwire Corp. has a market cap of $5.45 billion; its shares were traded at around $5.515 with and P/S ratio of 9.8.
“We currently own common equity and debt in Clearwire Corporation (“Clearwire”), which owns 45 billion MHz of wireless spectrum and operates the nation’s first true 4G wireless network. To date, Clearwire has investedapproximately $20 billion in buying spectrum and funding the buildout of its wireless network to its currentcoverage of 120 MHz pops. Its present enterprise value is $12 billion, meaning you are creating the firm for 60%of invested capital. Importantly, we believe replacement cost is significantly greater than $20 billion given thescarcity of the spectrum assets and the time value of money.”
“So simply put, we like Clearwire because: a) there is significant downside support from asset value, b) the investment to build those assets is substantially behind them, and c) the wireless industry is at an inflection point in terms of demand for these assets. Directionally, we believe we are playing for 25-30% annualized returns in Clearwire. “
This is the holding history of Larry Robbins with Clearwire. Apparently he has been accumulating the stocks.
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