After a Rough Year for Dan Loeb’s Third Point Can Spinoffs Turn Around 2019?

When we last checked in on Dan Loeb’s Third Point it was mid 2017 and the fund was cruising while also singing the praises of Baxter International (BAX). Unfortunately, 2018 was a rough year for the firm and performance, at -11.3%, lagged the overall S&P 500. Market Folly shares the fund’s recent Q4 mea culpa letter which offers some good insight on the macro economy and the overall credit markets. More importantly, it also contained some updates on the firm’s positions, several of which should be of interest to our readers:

1. Baxter International – yup, Baxter is still sitting in the portfolio and the fund is still singing its praises. Some things don’t change. The pharma company which spun off Baxalta in 2015 (which was then bought by Shire in 2016) is actually Third Point’s largest position. It even has a representative on the board of directors! Mr. Loeb still loves CEO Joe Almeida and the fund is ‘enthusiastic about the direction of Baxter and the investment opportunity ahead’. The letter highlights three growth ‘vectors’ for the company: 1) operational excellence (aka improved operating margins) 2) capital allocation (buybacks, dividends and strong R&D/M&A decisions) – Third Point still feels the company is underlevered compared to its peers and 3) portfolio optimization.
2. United Technologies (UTX) – Third Point notched a big win at UTX when the company announced it would break itself up into three more focused companies. Unfortunately, according to Mr. Loeb, ‘the initial announcement caused confusion and created uncertainty about the free cash flow generation of newly-acquired Rockwell Collins’. Whoops. Management has worked to rectify these issues, but the ‘sum-of-the-parts discount has continued to widen and the valuation gap versus UTC’s closest multi-industry peer, Honeywell International, has reached a new 10-year high’. Just shows that the best laid plans don’t always yield immediate results.
3. Campbell Soup (CPB) – Third Point actually waged a very public proxy battle with the stodgy food company, ultimately settling for two board seats and direct access to the C-Suite. In the midst of it, producing this amazing video.

   Even though the fund took an offer it had previously rejected, the results were still impressive considering the amount of family control over the company’s shares. Mr. Loeb had previously urged the company to explore a sale, but it wouldn’t be surprising if we end up having to write more about the company in the future.

4. Nestle SA (NSRGY) – the company is currently reviewing ‘strategic options’ for several of its units so this is another company to watch.

As part of the letter, Third Point affirmed that it will continue focusing on event driven and activist investing. As a result, expect to continue seeing Mr. Loeb in the news and on this site.

Disclosure: Author holds no position in any stock mentioned.