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Daniel Loeb Buys Mosaic, FCX, ABX, and Adds to Sara Lee

August 17, 2011 | About:
Daniel Loeb is the founder of Third Point LLC, a New York based hedge fund with over $7.1 billion in assets under management. He utilizes a value investing strategy that is very similar to that of Joel Greenblatt, firmly believing in investing in undervalued companies. Loeb looks at a company's underlying fundamentals and factors in the company's legal, regulatory and accounting aspects when selecting stocks. He is perhaps best known for his public letters to company executives in which he mordantly addresses the company's performance issues and openly disapproves of their conduct. Over the past ten years, Loeb's Master Fund has earned a cumulative return of 315.6%, completely outpacing the S&P 500's return of 16.4% in the same period. In his second quarter portfolio update, Loeb bought Mosaic (MOS), Freeport-McMoRan (FCX), Barrick Gold Corp. (ABX) and added to his holdings in Sara Lee (SLE).

Mosaic Company (NYSE:MOS)

According to Loeb's second quarter investor letter, he initiated a large position in Mosaic through an "opportunistic entry point," purchasing stock through a secondary offering of shares when the long-term owners of the company announced plans to sell its 64% stake. The secondary was priced at $65 and Loeb purchased 2,400,000 shares of the company, impacting his portfolio by roughly 5.6%. The Mosaic Company is one of the world's leading producers and marketers of concentrated phosphate and potash crop nutrients. For the global agriculture industry, Mosaic is a single source for phosphates, potash, nitrogen fertilizers and feed ingredients.

According to Mosaic's fourth quarter report for the period ended May 31, net earnings were $649 million, or $1.45 per diluted share, compared to $396 million, or $0.89 per diluted share, last year. Net sales increased 54% year-over-year, from $1.9 billion to $2.9 billion. This was driven primarily by higher selling prices, partially offset by increased phosphate raw material costs and potash resource taxes. Net sales in Potash totaled $982 million, a 41% increase over last year. Potash production was 2.2 million tons, up from last year's 1.9 million tons. Net sales in Phosphates were $1.9 billion, a 58% increase over last year. Production was 2.1 million tons, compared to 1.9 million tons last year. The company generated almost $1 billion in operating cash flow during the quarter and free cash flow was $607 million, an increase over last year's free cash flow of $257 million.

The company's potash expansion program continued to make progress whilst maintaining operational efficiency in its Phosphates segment. Maintenance efficiency improved approximately 60% year-over-year and improved mine operations resulted in a 4.3% year-over-year increase in rock production at Mosaic's largest producing mine. The company also completed its split-off from Cargill, a move that "enhances Mosaic's strategic and financial flexibility and greatly increases the liquidity of its common stock."

For the fiscal year, Mosaic recorded net income of $2.5 billion, a record high. Net sales were $9.9 billion, up 47% over last year's $6.8 billion. Operating earnings more doubled year-over-year, up from $1.3 billion to $2.7 billion. The increases in sales and earnings were a result of increased phosphate selling prices and higher potash volumes, partially offset by higher phosphate raw material costs. Gross margin increased from 25.1% to 31.4% and operating margin improved from 18.8% to 26.8%.

Mosaic has a market cap of $18.4 billion. The stock trades with a P/E ratio of 11.9, slightly below its historical average. Its P/S ratio is 1.9, below its historical average. Its P/B ratio is 1.6, very near its historical low. The company has a strong balance sheet with a debt-to-equity ratio of 0.07, having decreased it almost every quarter since 2007.

Freeport-McMoRan Copper & Gold (NYSE:FCX)

Loeb purchased 1,650,000 shares of Freeport in the second quarter at an average price of $50.96, impacting his portfolio by 3.24%. The price has since decreased by 8%. Freeport-McMoRan is engaged in mineral exploration and development, mining and milling of copper, gold and silver in Indonesia and the smelting and refining of copper concentrates in Spain and Indonesia. They are the world's lowest-cost copper producer and one of the world's largest producers of copper and gold.

According to Freeport's second quarter report, the company's net income for the quarter was $1.4 billion, more than doubling last year's net income of $649 million. Revenues increased by more than 50%, from last year's $3.8 billion to $5.8 billion. Consolidated sales totaled 1.0 billion pounds of copper, 356 thousand ounces of gold and 21 million pounds of molybdenum, an increase across the board over last year's sales of 914 million pounds of copper, 298 thousand ounces of gold and 16 million pounds of molybdenum. Copper sales exceeded estimates and benefited from increased production in North America as well as timing of shipments in South America and Africa. Gold sales were slightly less than estimated, a result of timing of mine sequencing. Molybdenum sales exceeded estimates as a result of improved demand.

Freeport stated that it is conducting exploration activities near its existing mines with a focus on opportunities to expand reserves that will support the development of additional future production capacity. Capital expenditures totaled $527 million, an increase over last year's $296 million and the company expects an approximate $2.6 billion in capital expenditures for the fiscal year. Major products to be funded primarily include underground development activities at Grasberg, construction activities at the Climax molybdenum mine and completion of the initial phase of the sulfide ore project at El Abra.

Freeport has a market cap of $43.8 billion. The stock trades with a P/E ratio of 7.8, below its five-year average. Its P/S ratio is 2.3, consistent with its ten-year average. Its P/B ratio is 2.6, slightly below its ten-year average. During the quarter, Freeport repaid $1.2 billion in debt, leaving $3.5 billion left in long-term debt. The company now has its lowest debt-to-equity ratio in seven years at .207.

Barrick Gold Corp. (NYSE:ABX)

Loeb purchased 1,850,000 shares of Barrick Gold in the second quarter at an average price of $47.73, impacting his portfolio by 3.11%. The price has since increased by 6%. Barrick is the gold industry leader, with interests in 26 operating mines and a pipeline of projects located across five continents, in addition to large land positions on some of the most prolific mineral districts.

According to Barrick's second quarter report, revenue for the quarter increased 30.7%, from $2.6 billion to $3.4 billion. This was a result of both higher realized gold and copper prices as well as higher gold sales volumes. Gold production was 1.98 million ounces at total cash costs of $445 per ounce and net cash costs of $338 per ounce. Gold cash margins increased 33% to $1,068 per ounce and net cash margins increased 30% to $1,175 per ounce. Copper cash margins increased 39% to $2.51 per pound. As a result, net earnings rose 35% from $859 million last year to $1.2 billion.

During the quarter, Barrick continued its exploration programs throughout the world. The company also completed the acquisition of Equinox Minerals in July, adding two copper mines and increasing their leverage to strong copper prices while maintaining their gold exposure. The company has noted that stronger metal prices have "significantly improved project economics and overall rates of return despite higher estimated capital costs."

The company has a market cap of $48 billion. The stock trades with a P/E ratio of 12.9, very near its historical low. Its P/S ratio is 4.6, below its ten-year average. Its P/B ratio is 2.1, roughly in line with its ten-year average. Revenue per quarter has been growing at a consistent rate in each of the past nine quarters. However, long-term debt substantially increased over the past quarter, jumping to $13.2 billion, up from the past four quarters of roughly $6.6 billion in debt.

Sara Lee Corp. (SLE)

Loeb first bought holdings in Sara Lee when he purchased 2 million shares of the company in the first quarter of 2011 at an average price of $17.40. In his most recent move, Loeb more than tripled his holdings, purchasing 4.65 million more shares at an average price of $18.92, impacting his portfolio by 3.27%. In his investor letter, Loeb revealed that he believes the market "continues to underestimate the true earnings power of these assets," stating that that company trades at roughly 6x normalized EBITDA while competitors trade at 9x multiples. He also likes the new chairman of the board, Jan Bennink, who is "playing a very active role." He believes that Sara Lee's meat business could be acquired quickly and that the coffee business could repeat Binnink's success with Numico by increasing value and being sold for a huge premium. Loeb now has 6,650,000 total shares in Sara Lee. The price has since decreased 5%.

Sara Lee Corporation engages in the manufacture and marketing of a range of branded packaged meat, bakery and beverage products worldwide. It offers packaged meat products, frozen baked products, coffee and tea products and refrigerated dough. The company sells its products under Hillshire Farm, Ball Park, Jimmy Dean, Sara Lee, State Fair, Douwe Egberts, Senseo, Maison du Café, Marcilla, Merrild, Pickwick, Café Caboclo, Café Pilão, Bimbo, CroustiPate, Ortiz and BonGateaux brand names.

According to Sara Lee's fourth quarter report for the period ended June 30, adjusted net sales increased 8% from $2.1 billion to $2.3 billion. Adjusted operating income grew 40%, from $135 million to $189 million. Corporate expenses decreased by $33 million. However, reported net income decreased from $191 million last year to $113 this year largely due to income tax benefits last year.

In the North American Retail segment, adjusted net sales increased 4% primarily due to pricing actions and adjusted operating margins improved 590 basis points. Strong product performance from its brands more than offset negative volume impact from early pricing actions. In the North American Foodservice segment, adjusted net sales increased 9%, driven by pricing actions across the portfolio and adjusted operating margins improved 100 basis points. Segment volumes declined overall, though manufacturing efficiencies and favorable sales mix improved operating income.

In the International Beverage segment, adjusted net sales increased 14% due to pricing and sales mix as well as higher green coffee export sales from Brazil, partially offset by weaker volumes from multiple price increases. The business is also aligning its organizational structure by redesigning and optimizing the marketing and R&D functions. In the International Bakery segment, adjusted net sales decreased 8% due to competitive conditions in Spain and difficult macro-economic situations. Price reductions were required to maintain market share, which hurt margins and decreased operating income.

The company continues its divestments and restructuring to create "two pure-play companies" by the first half of calendar 2012. According to Executive Chairman Jan Bennink, the company is "achieving our objective of streamlining the portfolios to provide the best foundation for strong and focused businesses moving forward." The company intends to divest its Spanish bakery and French refrigerated dough businesses and sold its North American refrigerated dough business to Ralcorp for $545 million. It has also sold its North American Fresh Bakery to Grupo Bimbo and continues its insecticides divestitures. In preparation for the spin off, Sara Lee has identified cost reduction opportunities of $180 million to $200 million achievable within fiscal 2012 and 2013.

Sara Lee has a market cap of $10.7 billion. Its stock trades with a P/E ratio of 8.6, below its ten-year average. Its P/S ratio is 0.9, very much in line with its ten-year average. Its P/B ratio is 6.8, also in line with its ten-year average.

This is part of GuruFocus Real Time Picks report, which reports the stock trades of Gurus within the last few days. For more information, go to Real Time Picks.

Rating: 2.6/5 (13 votes)


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