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Daniel Loeb Buys Sotheby’s Stake in Winning Streak

August 28, 2013 | About:
Holly LaFon

Holly LaFon

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Some of his high-profile hedge fund colleagues have experienced mixed results from their activist investments recently, but Daniel Loeb has been on a fairly good streak with his biggest bets such as Yahoo (YHOO) and Herbalife (HLF). This week he dove into his next project: art auction house Sotheby’s (BID).

Reported on Monday, Loeb purchased a 5.78% stake in the company, equaling 3,925,000 shares, according to GuruFocus Real Time Picks. The 13D filing states that he accumulated the shares in a series of purchases and sells taking place from June 26 through Aug. 23. His purchase prices ranged from $37.64 to $45.76.

His hedge fund, Third Point, paid $156,716,025 in aggregate for the shares.

As the “purpose of transaction,” the filing says:

“The Reporting Persons intend to engage in a dialogue with members of the Board or management of the Issuer or other representatives of the Issuer. The Reporting Persons may also engage in a dialogue and other communications regarding the Issuer with other stockholders of the Issuer, knowledgeable industry or market observers (including art market participants), or other persons. Any dialogue or communications with any of the foregoing persons may relate to potential changes of strategy and leadership at the Issuer and proposals that, if effected, may result in one or more of the events described in Item 4 of Schedule 13D.”

Sotheby’s is a London-based company auctioning authenticated fine art, decorative art and jewelry. Year to date, Sotheby’s shares have climbed almost 37%, trading for $45.96 after a 2.65% decline on Tuesday. The company has a $3.14 billion market cap.

In the past five years, Sotheby’s has grown revenue per share at a rate of 6.2%, and EBITDA per share at a rate of 33.6%.

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BID
data byGuruFocus.com

In the second quarter, the company’s revenues were almost flat over the prior-year quarter, at $304.8 million. The quarterly commission revenue received a $19.8 million boost from an increase in the buyer’s premium rate which took effect on March 15. But contracting sellers’ margins weighed on results, as pressure from competition to win high-value consignments intensified.

In the future, the company is looking to improvements in its digital media offerings and expansion into China and emerging markets to increase its financial results.

Quarterly earnings increased 7% from the prior year, to $91.7 million, primarily due to an income tax benefit. Earnings are down 7% for the first half of the year.

Yahoo (YHOO)

Last month, Loeb sold down his position in Yahoo by 201%, retaining just 20.6 million shares. He had by the third quarter of 2012 amassed a position of more than 73 million shares, after he began buying copiously in the third quarter of 2011. His activity with the company helped the price surge and has given him about a 100%, or $1 billion profit.

Upon selling most of his Yahoo shares, Loeb wrote in his mid-year commentary:

“Since Third Point initiated its position, over $15 billion of value has been created, growing the company's market cap from $15 billion to $30 billion today, while over $5.2 billion of cash has been returned to shareholders. Since Third Point made "The Case for Alibaba" in our original investment presentation, our Fourth Quarter 2011 Investor Letter, and on our valueyahoo.com shareholder advocacy website, consensus Wall Street estimates for Alibaba's value have increased from $20 billion to over $80 billion. In addition, and consistent with our views on Japan, Yahoo Japan's value has also more than doubled during this period.”

He also praised Yahoo’s new board members and CEO, Marissa Mayer, who has headed the transformation of the company.

Herbalife (HLF)

Loeb purchased 3.1 million shares – about 8% -- of Herbalife in the fourth quarter of 2012 when it tumbled in reaction to fellow investor Bill Ackman’s presentation eviscerating the company. He also offered his own counter-thesis on the company in his fourth quarter letter, refuting Ackman’s three claims about the company: that it is an “illegal pyramid scheme,” that its customers and distributors had been exploited and harmed and that its products are sold at inflated prices.

In his fourth quarter letter, he said:

We believe that continued strong operating performance combined with disciplined capital return could easily send the stock back towards its April highs. Let’s not forget: the business itself is performing well. Volume, revenue and earnings are all growing double digits and the balance sheet is largely unlevered. Management has a history of returning 100% of net income to shareholders in the form of dividends and buybacks. If management were to deploy its existing $950 million buyback authorization in the $40-45 range (only taking leverage to approximately 1.5x), we estimate that run-rate EPS for 2013 could be $5.50-5.70 using the reduced share count. Applying a modest 10-12x earnings multiple suggests Herbalife’s shares are worth $55-$68, offering 40-70% upside from here and making the company a compelling long investment for Third Point.

Loeb then closed out his Herbalife position in the first quarter when the price averaged $38.84 – up from the roughly $26 per share December low. If he had held on slightly longer, shares eventually did reach his $55 to $68 intrinsic value range.

Herbalife share price:

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Besides Yahoo, Loeb’s top holdings are AIG (AIG), Liberty Global Group Inc. (LBTYA) and Thermo Fisher Scientific Inc. (TMO), up 42%, 19% and 17%, respectively, from his average purchase price.

See Daniel Loeb’s portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Daniel Loeb.

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