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Third Point Capital's Dan Loeb on CIT Group, Health Net and Mead Johnson Nutrition

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Mar 05, 2010
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Third Point Capital’s Dan Loeb just published his fourth quarter shareholder letter. He mentioned some of his holdings in his portfolio. These are his commentaries on CIT Group, Health Net and Mead Johnson Nutrition

CIT Group

CIT is currently one of our largest positions because we believe it presents a compelling option on the potential revitalization of one of the country’s largest middle”market lenders as it transitions (according to our thesis) to a lending institution which will be funded eventually via a retail deposit base. This path will require regulatory approvals, but the company has already reduced debt by some $10B and has extended maturities so that it has time to attempt this transition to a bank”centric model while optimizing the value of its non”bank eligible businesses (e.g. transportation finance) as the economy stabilizes and asset values recover.

Since the beginning of the year, CIT shares have appreciated approximately 32%, significantly exceeding the results of the S&P 500 (flat) and the BKX KBW bank index (+10.5%).

CIT Group Inc. is a bank holding company that provides financing and leasing capital for commercial companies throughout the world. CIT Group Inc. has a market cap of $14.33 billion; its shares were traded at around $35.4.

CIT is in the portfolios 10 gurus, including Carl Icahn of Icahn Capital Management LP, David Einhorn of Greenlight Capital Inc, Seth Klarman of The Baupost Group, Daniel Loeb of Third Point, LLC, Bruce Berkowitz of Fairholme Capital Management, Steven Romick of FPA Crescent Fund, Jeremy Grantham of GMO LLC, Steven Cohen of SAC Capital Advisors etc.

Health Net

In the midst of the chaos during last summer’s healthcare debate, we established a position in Health Net common equity when the stock sold off following the announcement of the company’s loss of its Tricare contract with the US Department of Defense and the sale of its Northeast assets to United Health. We believed this contract loss was not a fait accompli and that the prevailing price did not reflect the residual value in the business. We also felt that the resolution of healthcare reform legislation would remove the current valuation overhang across the managed care space. Health Net’s high quality management team is focused on maximizing shareholder value, and CEO Jay Gellert is a significant shareholder in the company.

We expect Health Net will increase profitability over the next several quarters as

management focuses on reducing costs. Post health care reform, the benefits of scale will become increasingly important as the industry focuses on wringing costs out of the system.

The Company has significant cost reduction opportunities and is well positioned to take advantage of consolidation in the healthcare industry once the regulatory environment stabilizes.

Health Net, Inc. is an integrated managed care organization which administers the delivery of managed health care services. Health Net Inc. has a market cap of $2.47 billion; its shares were traded at around $23.75 with a P/E ratio of 10.5 and P/S ratio of 0.2. Health Net Inc. had an annual average earning growth of 6.6% over the past 5 years.

HNT is in the portfolios of Daniel Loeb of Third Point, LLC, Steven Romick of FPA Crescent Fund, Richard Snow of Snow Capital Management, L.P., David Einhorn of Greenlight Capital Inc, etc.

Mead Johnson Nutrition

As we mentioned in our Third Quarter 2009 letter, we primarily focus on mergers and acquisitions as fertile ground for compelling fundamental investment opportunities as more often than not, we find unlevered arbitrage spreads uninteresting. A few investments made during the Fourth Quarter highlighted the value in this approach, one of which was a new long position in the shares of Mead Johnson Nutrition (MJN, Financial). MJN is a global leader in infant formula and pediatric nutrition and is most well”known for its flagship product, Enfamil.

We like the MJN story for two reasons. First, the company has a highly attractive earnings growth profile. It generates almost 60% of its sales from emerging markets in Asia and Latin America, where structural tailwinds like increasing middle class births, greater levels of consumer education, and higher female participation in the workforce are driving sustainable double”digit sales growth. Once birth rates normalize in the developed world, the company will generate one of the fastest long”term sales and profit growth rates in the large cap consumer staples universe.

Second, we believe the company represents a compelling acquisition target for multiple parties following its complete separation from Bristol”Myers Squibb in December 2009.

MJN’s geographic footprint (high market share in North America and key emerging markets around the world and low market share in Europe) is highly complementary to that of Nestle or Danone. Additionally, both companies are focused on health and wellness, have acquired infant nutrition assets in the past (Nestle paid 15.7x EBITDA for Gerber and Danone paid 21.7x EBITDA for Numico), and are currently large enough to swallow MJN.

Now that MJN is fully independent, Bristol”Myers Squibb’s low tax basis in the asset no longer complicates a potential transaction. Though the timing of such an event is of course difficult to predict, and several tax, legal and regulatory hurdles may first need to be overcome, we are content to wait for a buyer to emerge, knowing we paid a fair price for a truly best”in”class asset with a long runway of emerging markets”led growth.

Mead Johnson Nutrition Company is a pediatric nutrition company. Mead Johnson Nutriti has a market cap of $9.92 billion; its shares were traded at around $48.5 with a P/E ratio of 21.9 and P/S ratio of 3.5. The dividend yield of Mead Johnson Nutriti stocks is 1.7%.

MJN is in the portfolios of Paul Tudor Jones of The Tudor Group, Daniel Loeb of Third Point, LLC, Lee Ainslie of Maverick Capital, Stanley Druckenmiller of Duquesne Capital Management, LLC, John Paulson of Paulson & Co., Edward Owens of Vanguard Health Care Fund, David Winters of Wintergreen Advisors, Steve Mandel of Lone Pine Capital, Chris Davis of Davis Selected Advisers, Louis Moore Bacon of Moore Capital Management, LP, Louis Moore Bacon of Moore Capital Management, LP, John Buckingham of Al Frank Asset Management, Inc., Louis Moore Bacon of Moore Capital Management, LP, Jeremy Grantham of GMO LLC etc.[i][/i]

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