Founded in 1995, Third Point LLC seeks long-term capital appreciation through “event-driven, value-oriented investing.” As discussed in its prospectus, Daniel Loeb (Trades, Portfolio) invests in companies that are undervalued, or mispriced, based on market and relative valuation analysis. During the second quarter, the CEO made four trades in the online media and communications industries: two news buys, one reduction and one elimination.
Loeb purchased 3.75 million shares of Facebook Inc. (FB, Financial) at an average price of $115.23 per share. The social networking company currently has a financial strength rank of 9, implying a strong business operation. As mentioned in an earlier article, Facebook has high Piotroski F-scores and Altman Z-scores. With a current Z-score of 41.73, Facebook has almost no distress.
Additionally, the social networking company has a profitability rank of 8, implying high growth potential. The company’s operating margin currently outperforms 93% of global Internet content and information companies, and its EPS growth rate averaged 405.30% during the past three years.
The CEO of Third Point also invested 1.45 million shares of Charter Communications Inc. (CHTR, Financial) at an average price of $226.19 per share. Loeb also eliminated his position in Time Warner Cable Inc. (TWC, Financial), selling his 1.2 million shares at an average price of $208.56 and realizing a 10% estimated gain since the third quarter of 2015.
In its recent 10-Q filing with the Securities and Exchange Commission, the management at Charter Communications discussed its recent acquisition of Time Warner Cable. Expected synergies with the merger include a $7 billion increase in quarterly revenue, which results in increased adjusted EBITDA and earnings per share.
Based on the financial statement data, the TWC acquisition already increased total revenues. For the first six months, total revenues in 2016 nearly doubled from total revenues in 2015. Additionally, Charter Communications realized a net income of about $2.88 billion to its shareholders during the first six months of 2016. The communication services company currently has a profitability rank of 7, with a return on equity outperforming 93% of global pay TV companies.
On the other hand, Time Warner Cable has a deteriorating financial outlook. Although the cable company has a profitability rank of 8, the company has poor financial strength: the company has an Altman Z-score in distress zones, and its equity-to-asset ratio underperforms 83% of global pay TV companies. Furthermore, TWC experienced contracting operating margins in the past three years.
Time Warner’s stock price is currently near a 10-year high and its dividend yield is near a five-year low. These warning signs further suggest that TWC’s business outlook is likely unsustainable, leading to potential bankruptcy. Additionally, the company’s price-to-sales (P/S) ratio is near a five-year high, implying that the company is likely overvalued. Time Warner is also overvalued based on its Peter Lynch chart.
Eleven gurus, including Loeb, eliminated their positions in Time Warner during the second quarter, possibly due to the acquisition of TWC by Charter Communications.
Loeb also trimmed 42.86% of his stake in Alphabet Inc. (GOOGL, Financial), selling 300,000 shares at an average price of $734.01 per share. With this transaction, the Third Point CEO owns just 400,000 shares of Google and realized a 5% estimated gain since the first quarter.
As discussed in a previous article, Google historically had strong Altman Z-scores. This trend still holds: currently, the online media company’s Z-score is 15.05, suggesting almost no distress. Additionally, Google has a Piotroski F-score of 8 and interest coverage of 187.70. With these strong metrics, Google has a financial strength rank of 9.
Despite the strong financial outlook, Google has contracting margins and an asset growth rate higher than its revenue growth rate. These warning signs suggest that the online media company has a strong but unstable business operation. Additionally, Google is likely overvalued: its stock price is near a 10-year high, and its P/S ratio is near a five-year high. The company is also overvalued based on a price-earnings (P/E) ratio of 30.
See also
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Disclosure: The author has no position in any of the stocks mentioned in the article.
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