Dollar Thrifty, Hertz, AIG, Kinder Morgan: What Was York Capital Trading Last Quarter?

YORK CAPITAL MANAGEMENTJames Dinan is one of the hedge fund industry’s best success stories, rising to be one of its highest paid earners after losing it all on one black Monday morning in 1987. An MBA graduate from Harvard Business School, Dinan started his career at Donaldson, Lufkin & Jenrette, working as an investment banker until 1983, before moving to merger arbitrage at Kellner DiLeo & Co. On what is now known as Black Monday, Dinan lost the entirety of his moderately sized fortune due to highly leveraged bets that lost, but he came back stronger than ever, founding his own investment management firm in 1991.

Originally started with a mere $3.6 million, York Capital Management now manages close to $15 billion in assets under management, and Dinan himself has accumulated a net worth of $1.4 billion. York Capital manages a diverse portfolio of investments, as evident that its domestic equity portion only makes up a quarter of its total holdings, according to 13F filings with the SEC.

In the third quarter particularly, Dinan made a few surprising moves, including dumping his entire position in Dollar Thrifty Automotive Group, Inc. (NYSE:DTG), while cutting his stake in the tech giant Apple Inc (NASDAQ:AAPL). He wasn’t all bearish, though, as the fund manager did up his stakes in Hertz Global Holdings, Inc. (NYSE:HTZ), Kinder Morgan Inc (NYSE:KMI), and American International Group, Inc. (NYSE:AIG). Let’s start with the bad news first.

Dumping Dollar Thrifty for Hertz. At the end of June, Dollar Thrifty was Dinan’s top stock pick, amounting to nearly $430 million. As we originally mentioned a couple months ago, Dinan’s fund filed a 13G with the SEC just two weeks prior to the close of the third quarter, reducing his stake in the car rental company from 11.3% to 7.9%. In its latest 13F, York Capital curiously did not report a position in Dollar Thrifty, indicating that the fund had closed out its holdings entirely. In a downward move most likely related to Dinan’s sale, shares of Thrifty stock took quite a dive at the end of Q3, falling by nearly 13% between October 25th and November 5th.

Interestingly, York Capital sold its stake just weeks before the company was officially acquired by Hertz for $2.6 billion. In a deal that was originally shunned by antitrust regulators, Hertz will now assume control of Thrifty’s airport service business, though it will be forced to sell 62 Advantage brand outlets to maintain competitive balance. On the whole, the move makes Hertz the car rental industry’s second largest player, and will allow it to balance its premium rental options with the budget-focused portfolio that Dollar Thrifty provided.

Hertz’s management has stated that it expects to save at least $160 million from the purchase of Thrifty by the end of 2013, and sell-side analysts are even more bullish, expecting earnings to average growth of 38.5% a year over the next half-decade. With a forward P/E below ten and a PEG close to 0.5, it’s apparent that now may be a great time to get into Hertz post-merger, and it appears that Dinan agrees. Despite the fact that he sold Thrifty, the hedge fund manager did increase his position in the acquisitor by 3.6% last quarter, and now holds nearly $180 million worth of the stock. With the move, Hertz now slides nicely into York Capital’s top five.

Apple, the bear. As you can probably expect, Dinan was also bearish on Apple in the third quarter, electing to downsize his position in the tech giant by 37.2%. Over the past two months, shares of the Cupertino-based company have lost more than 20%, as it seems that they just can’t catch a break. While the value-hunters will focus on Apple’s attractive multiples, including its forward P/E below nine and its favorable earnings growth valuation, this strategy hasn’t worked too well recently.

See, as the most widely discussed stock in today’s markets, Apple is uniquely subjected to any bit of negative chatter, whether it’s related to the company’s Maps fiasco or rumors that it may switch to a six-month product cycle. In our opinion, it may be fruitless to attempt to catch a falling knife at the moment, at least until Apple can receive a catalyst that will boost it to a fairer valuation.

Upcoming events that may have the markets feeling a bit better include: (1) a late-November release of iTunes 11 with Facebook integration, (2) a deal with China Mobile to sell the iPhone 5S to the carrier’s 700 million subscribers, and (3) a positive earnings surprise in the first quarter, in which the Street is predicting $13.55 in earnings per share.

From Canaccord Genuity to UBS, the majority of analysts still expect positive appreciation out of Apple in the intermediate term, each with a price target in the $650 to $790 range. When considering the growth drivers mentioned above, investors should look toward a China Mobile deal as the most bullish, followed by a Q1 outperformance. Now, long term earnings growth is expected to slow considerably over the next few years, with forecasts of 20%-21% that are far below Apple’s historical five-year average (62.2%), but it’s hard to ignore the blatant value play; it just needs a bit of a push, that’s all.

AIG is rolling. Moving onto the good news, Dinan saw the third quarter a good time to buy into AIG, and he was not alone. Of the funds we track, interest in the insurer increased by 80%, with 110 funds holding long positions at the end of Q3. Aside from the U.S. Treasury’s latest sale that pushed ownership down to 22% and moved its bailout into profitable territory, AIG has been in investors’ good graces because of an exemplary financial performance last quarter. With earnings of $1.00 per share, Wall Street’s earnings consensus was beaten by double-digits, and even better, AIG reported that Hurricane Sandy would not have a material impact on its bottom line next quarter.

Looking at the stock’s price performance, it appears that fears over the superstorm pushed shares down a bit in late last month, and they still trade more than 15% below their all-time high of $37.67 that was hit in mid October. At a discount of nearly 50% in relation to its historical book value and an equally depressed forward earnings multiple, there’s not much to hate about AIG. The company is now a leaner, meaner insurer post-recession, and more share repurchases in proposal only sweeten the stock.

Looking ahead, AIG still faces risk from an over-dependence on property/casualty insurance which opens it up to more catastrophic losses, but that’s one of the only long term negatives we can find, and the avoidance of Sandy losses boosts our confidence in this area.

Kinder Morgan, the bull. Last but certainly not least, Dinan upped his stake in the natural gas utility company Kinder Morgan by more than 25% last quarter. Kinder Morgan completed its acquisition of El Paso, a natural gas transporter, in August, and expects the move to boost long term growth while allowing it to expand its pipeline system extensively.

The acquisition should improve cash flows from this segment by more than 50% over the next few years, and management forecasts initial synergies of at least $400 million. Additionally, a sale of El Paso’s E&P business has given Kinder Morgan the ability to “drop-down” these assets to Kinder Morgan Energy Partners and El Paso Pipeline Partners, two MLPs, while it avoids corporate taxation.

Aside from Kinder Morgan, we like both master limited partnerships, as each sports an EV/EBITDA ratio below 14.o. At a sub-1.0 PEG, Kinder Morgan also offers investors value, despite the fact that it is expected to grow its bottom line by 33.6% a year over the next half-decade.

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