His biggest purchases in the fourth quarter were Marvell Technology Group Ltd. (MRVL), Yahoo! Inc. (YHOO) and Dish Network Corp. (DISH).
Marvell Technology Group Ltd. (MRVL)
Loeb bought 10 million shares of Marvell Technology at approximately $14 per share in the fourth quarter of 2011.
Marvell manufactures semiconductors, particularly for Ethernet, cable and DSL-related communications devices. It has a history of financial strength and growth and fell to a historical low P/E and low P/B and P/S ratio in 2011.
Marvell’s free cash flow has also grown steadily, from $25 million in 2002 to $1.1 billion in 2011. The company has $2.4 billion on its balance sheet and only $166 million in long-term liabilities with zero long-term debt. Gross margin, operating margin and net margin almost all expanded to their highest levels of the decade in 2011 (except the operating margin, which was 27.4%, slightly under its 2006 level of 27.4%).
Marvell’s core market was formerly storage, but over the past few years it has broadened its portfolio and is beginning to see the positive results. The company’s revenue growth of 29% in 2011 over the previous year was driven primarily by growth in newly entered markets, particularly a 110% revenue increase in the mobile and wireless end market, and a 15% increase in networking. Improvements in the overall macro economy benefited the business as well.
Though the company has implemented long-term growth plans, it lowered its fourth-quarter revenue expectation to $735 million to $745 million, compared to their prior outlook of between $775 million to $825 million. Thailand floods had reduced the supply of disk drives which recovered later in the quarter than they anticipated, and demand in China was unexpectedly soft. They expect these negative events to be temporary.
Continued investment in growth is a priority for the company. New products they have introduced include the industry’s first MIMO-based WiFi system-on-a-chip with integrated WiFi, Bluetooth and FM capabilities, and the DragonFly Virtual Storage Accelerator that improves server I/O performance by over 10 times and works well with enterprise-class cloud computing applications. Entrance into new markets and improvements in existing technology are expected to contribute to growth as well.
Yahoo! Inc. (YHOO)
Loeb’s second largest purchase in the quarter was an addition of 8,000,700 shares to his Yahoo stake at about $16 per share. He initiated the position with 480,000,000 shares in the third quarter at about $14 per share and began pushing for changes immediately afterward.
Yahoo! Inc. is the global Internet communications, commerce and media company that has been struggling in the last several years. Yahoo! Inc. has a market cap of $20.03 billion; its shares were traded at around $15.065 with a P/E ratio of 19.2 and P/S ratio of 4.
Once a thriving company, Yahoo’s revenue and free cash flow declined each year from 2008 to 2010, though earnings increased. Most recently, in the company’s fourth quarter, its GAAP revenue decreased 13 percent year over year. For the full year, GAAP revenue decreased 21 percent to $4.98 billion, primarily because of a change in revenue presentation related to the search agreement and revenue share with Microsoft (MSFT).
The search agreement occurred in February 2010 and allowed Microsoft to control Yahoo’s search and advertising business for 10 years. In return, Yahoo would provide the main advertising sales team for Microsoft’s search engine, Bing. Microsoft now retains 12% of the search engine revenues generated by Yahoo’s website for the first five years. It pays the remaining 88% to Yahoo.
Loeb mentioned some of the reasons he found Yahoo compelling in his third quarter letter: “Third Point revealed ownership of a 5.2% stake in the shares of Yahoo! Inc in early September. Yahoo is the premier digital media company, with global reach and content leadership, growing audiences and market share, compelling international assets, and a revitalized technology platform.
Third Point’s original 13‐D letter and amendment filed alongside our SEC disclosure of ownership laid out our case for a targeted overhaul of Yahoo’s existing Board of Directors and encouraged the pursuit of strategic options to maximize Yahoo’s value. Since the filing of our letter, media outlets have reported that a strategic review process is moving forward and many parties are interested in the individual businesses and in some cases, the whole of Yahoo.”
Loeb has taken a very activist role with the company. A series of pointed letters between him and the management can be found here.
Dish Network Corp. (DISH)
Loeb bought 4 million shares of new holding Dish Network Corp. (DISH) in the fourth quarter at about $26 per share.
Dish Network Corp. offers satellite television products and services. Dish Network Corp. has a market cap of $12.72 billion; its shares were traded at around $29.02 with a P/E ratio of 10.4 and P/S ratio of 1. Dish Network Corp. had an annual average earnings growth of 28% over the past 10 years.
Dish was also a featured Magic Formula stock pick on GuruFocus in September 2011. The author notes that the company’s share price has stagnated while the underlying business value has increased. Over the last five years, its share price has declined 24%.
Revenue at the company increased every year from $4 billion in 2001 to $12.6 billion in 2010, and earnings have increased from a net loss of $215 million to a gain of $985 million over the same span of time. Free cash flow has been strong for the last eight years.
The company is highly levered, however. It has about $3.4 billion in cash on its balance sheet, along with about $8.8 billion in long-term liabilities and debt.
It is also losing customers. In its most third quarter, it lost approximately 111,000 net subscribers, compared to 29,000 subscribers lost during the third quarter of 2010. The increase in lost subscribers was from increased competitive pressures and competitors’ promotional offers. Also, telecommunications companies continuing to gain new customers and the overall weak economy contributed.
“Going forward, we plan to build on the momentum of our introduction of the Blockbuster-branded programming service which allows DISH customers to stream movies and TV shows as well as receive DVDs by mail,” said Joe Clayton, president and CEO of DISH Network.
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