Baupost Group took a new stake in American International General (AIG), now making up the sixth position in Baupost's portfolio. Even amidst the "bailout" upheaval, AIG remains one of the top sellers of workers comp, professional liability and property coverage. The company remains committed to de-risking and re-focusing on core insurance operations, which I think is a long-term positive.
Around 60% of revenues are generated by its general insurance segment, which underwrites various business insurance products, including large commercial or industrial property insurance and liability. Meanwhile, another 20% of revenues is generated from SunAmerica Financial, the domestic life insurance and retirement services segment. Both of these major insurance segments are a big part of of AIG revenues and should also help the company continue its post-bailout growth. From a valuation standpoint, at the end of 2012, AIG's book value per share rose to $66, a 24% increase year over year. Yet, the stock trades at just over half this.
Tech Is out of Favor
Meanwhile, Baupost sold off its entire stakes in two tech companies, Hewlett-Packard (HPQ) and Microsoft (MSFT). Baupost had 7.4% of its portfolio invested in HP at the end of the third quarter. HP continues to see weakness related to its PC and PC-related products business. This is in part due to the competitive pressures the company is faced with, coming from the likes of other tech companies, such as IBM, EMC, Dell, Apple, BMC Software, Canon, Lexmark and Samsung, just to name a few. The notable pressures for HP should continue, as the tech company still gets over 50% of revenues from PC and printer sales. Challenges for these industries (PCs and printers) are tied to secular declines and cannibalization by mobile computing devices (read more about HP's vast troubles).
Microsoft is an impressively diverse company, and if there were a tech company that I think Klarman should own it would be Microsoft. But he chose to exit the stock last quarter. The company is undoubtedly seeing pressure from a declining PC market, thanks in part to its dominant position in the desktop and notebook market, with respect to operating systems. However, the company is making strides to hedge this exposure with its recent launch of a tablet and embarking on mobile with a mobile operating system (read more about other dividend-paying techs). As far as how HP and Microsoft's growth stacks up, HP is expected to grow EPS at only 0.25% over the next five years, while Microsoft is expected to grow at 9%.
As far as downsizing, Baupost cut stakes in Oracle (ORCL) and News Corp (NWSA), selling off 22% and 36% of its third quarter stake, respectively. Oracle has a relatively high amount of debt, with over $19 billion in notes payable as of last quarter, compared to the $15 billion in the previous quarter. Sun Microsystems propelled Oracle to the forefront with respect to database software; however, the full integration has taken longer than expected. And it could take a number of years before the company starts providing EPS growth. The integration will likely continue to require a large portion of working capital and also pull Oracle away from its core software-only business model.
Oracle is also seeing pressure in its general hardware business with revenues down 18% year over year for the first half of fiscal 2013. Part of its troubles in hardware stem from the fact that competition is robust in the market, with Oracle now competing with the likes of IBM and HP, who are looking to expand beyond their own troubled industries.
News Corp, another Klarman selloff, appears to be in "fair value" range, trading at 18 times earnings, which is in line with major peers Time Warner, Disney and Comcast. Management has revised 2013 operating income projections, lowering expected growth from the low double digits to mid-single digits, on the back of lower than expected performance from SKY Italia and Fox. SKY had a second quarter fiscal 2013 operating loss of $20 million, compared to the $6 million from the same quarter last year.
Despite the impending spin off of its publishing unit, there will still be fundamental issues to address that involve a downtrend in advertising spending, which is the company's main revenue stream (see if News Corp's spinoff is worth investing in). The fundamental shift from advertising dollars being spent on print and TV to Internet is expected to continue, another key headwind for the company.
Don't Be Fooled
Seth Klarman is an impressive value investor, and it appears his big theme for this year is that major tech companies will continue to struggle as PC demand declines further. Although I can agree with the Oracle and HP sell offs, I still believe there is value to be had in investing in Microsoft. Also, Klarman dumped News Corp, a good decision, and he invested heavily in AIG. The insurer should prove to continue its growth as it refocuses on core insurance operations.