Dover Corp (DOV), DowDuPont Inc (DWDP) & More: Billionaire Dan Loeb’s Third Point Q3 Letter and Portfolio Updates

As many hedge funds have been struggling to keep up with the market that has been registering record highs what seems like every day, activist investors have been in the spotlight more frequently than ever. Activists don’t just follow the market and invest in stocks that usually tend to go with the flow, but identify companies that have intrinsic value and the underlying causes of their underperformance on the stock market. This allows activists to urge companies to change their business models, replace key executives, and execute other actions that unlock shareholder value and propel the stock higher.

One activist fund that has been pretty successful this year is Third Point, led by billionaire Dan Loeb. Third Point’s Offshore Fund gained 3.4% in the third-quarter, while its Ultra Fund registered a 4.9% return, according to the fund’s third-quarter letter to investors. These earnings were driven by the strong performance of Alibaba Group Holding Ltd (NYSE:BABA), Baxter International Inc (NYSE:BAX), DowDuPont Inc (NYSE:DWDP), Facebook Inc (NASDAQ:FB), and Honeywell International Inc. (NYSE:HON), which represented Third Point’s biggest winners of the quarter. At the same time, Nestle, Sothebys (NYSE:BID), Vulcan Materials Company (NYSE:VMC), as well as an undisclosed short bet and a position in asset-backed securities, also undisclosed, offset Third Point’s performance and counted among the fund’s largest losers.

Third-quarter performance brought Third Point’s Offshore and Ultra funds’ year-to-date returns to 14.5% and 23%, respectively. In this way, since inception, Third Point Offshore has posted an annualized return of 15.8%, while Third Point Ultra’s return amounted to 23.7%.

Dan Loeb’s fund remains bullish on the stock market, as it expects that promised deregulation will make it easier for companies to operate, while the tax reform that the new White House administration is currently working on should help the U.S stock market to continue its growth, also helped by strong consumer and business confidence combined with synchronized global growth. The fund also pointed out that the weaker US dollar and the Fed’s decision to hold off on raising interest rates last year helped to improve global financial conditions, which aided growth. Moreover, stock markets around the world have gained more ground, helped by earnings.

Third Point is especially bullish on U.S stocks, which it believes should continue to appreciate on the back of strong earnings expectations, which in turn, are driven by global GDP growth and potential tax cuts. The fund anticipates that the S&P 500 companies will see their earnings increase by 12% in 2018. The letter added that Third Point also has increased its exposure to European markets, mainly through initiating a stake in Nestle SA (ADR) (OTCMKTS:NSRGY) in June.

Dan Loeb’s Third Point is one of over 600 investors that we track at Insider Monkey. Given that it’s an activist fund, Third Point often files updates with the Securities and Exchange Commission regarding its investments and in many cases these updates can help move a stock higher or lower. To stay on top of things, you can follow Third Point on our website and receive real-time alerts to your email whenever Third Point files a 13D disclosing a new position, amends an existing holding (or provides updates regarding its activist campaign), or discloses its quarterly 13F portfolio. To do that, you should subscribe to Insider Monkey and add Third Point to your follow list.

Having said that, on the next page we’ll take a closer look at Third Point’s commentary regarding its new investment, Dover Corp (NYSE:DOV), as well as see some updates regarding three activist positions of the fund.

During the third-quarter, Third Point initiated a stake in Dover Corp (NYSE:DOV) and has already engaged in “constructive dialogue with management regarding several compelling value creating opportunities.” The industrial conglomerate caught Third Point’s attention due to its leading position in consolidated end markets and the underperformance that the stock had shown compared to its industry peers.

The underperformance was caused by the drop in earnings registered by Dover Corp (NYSE:DOV)’s energy business and the decline of oil prices. To address this issue, Third Point proposed the separation of the energy segment, which would be an attractive acquisition opportunity for many buyers, given that the segment has strong cash flow and recurring parts and service revenue. On the other hand, Dover Corp (NYSE:DOV) would be able to reduce its earnings volatility as its business won’t be so tied to the cyclicality in energy prices.

Moreover, Third Point thinks that Dover Corp (NYSE:DOV) should focus more on its core industrial portfolio, such as printing and identification and retail fueling, where the company has either the largest or the second-largest market shares. While more than half of Dover’s industrial EBIT is generated in these consolidated markets, its margins are lower in comparison to peers. Dover’s management recently addressed this issue by setting a target of 300 basis points in margins increases by 2019 and Third Point was reassured that the company is going to commit to these goals. The investor also believes that Dover Corp (NYSE:DOV) should optimize its capital allocation.

Dover Corp (NYSE:DOV) has already taken some of the steps suggested by Dan Loeb and his team. In addition to the margin targets, management has announced that it is exploring strategic alternatives for its energy business and plans to switch to the “adjusted EPS” reporting system to highlight its cash flow generation. Third Point still considers Dover Corp (NYSE:DOV)’s stock attractive, as it is trading at 14-times 2019 estimated free cash flow, significantly lower compared to the 18-times 2019 consensus free cash flow of its peer group.

In Honeywell International Inc. (NYSE:HON), Third Point initiated a stake during the third-quarter of 2016 and last reported ownership of almost 1.28 million shares of it, as of the end of June. In March, Honeywell International Inc. (NYSE:HON) appointed a new CEO, Darius Adamczyk, and Third Point outlined its position that a “more streamlined Honeywell could accelerate growth and yield sustainable value creation,” during a meeting with him. The fund also suggested spinning off Honeywell’s Aerospace division as the most impactful measure to streamline the company’s operations.

Earlier this month, Honeywell International Inc. (NYSE:HON) said it would spin off its home and transportation businesses, which have combined revenue of $7.5 billion, into two new separate companies. The move, which is expected to be completed by the end of 2018, was approved by Third Point. The investor said it is confident that Mr. Adamczyk will continue to execute on improving Honeywell International Inc. (NYSE:HON)’s portfolio.

On the next page, we will present Third Point’s updates regarding its investments in DowDuPont Inc (NYSE:DWDP) and Nestle SA.

In DowDuPont Inc (NYSE:DWDP), Third Point held 16 million shares at the end of June, with the $1 billion stake being its second-largest in terms of value. This is one of Dan Loeb’s older investments, as the fund first held shares of the Dow Chemical Company back in 2013. In 2015, the fund got two board seats and negotiated with management regarding the company’s future after the merger with E I Du Pont De Nemours And Co (NYSE:DD). After the merger had been completed, DowDuPont Inc (NYSE:DD) announced that it would separate into three independent companies, which is something that Third Point suggested back when it added the company to its portfolio.

“[…] DowDuPont carries an unlevered balance sheet and retains significant M&A optionality. Yet, DowDuPont trades at just 8.6x consensus EBITDA in 2019, a substantial discount to its sum-of-the-parts when we look at the multiples of the likely comparables for the three (or more) Spin-Cos. As a result, we continue to see significant upside to our investment in DowDuPont,” Third Point said.

Nestle SA (ADR) (OTCMKTS:NSRGY) is one of Dan Loeb ‘s European investments, although since the position was not disclosed in its second-quarter 13F, the fund did not buy its US-listed ADR shares. According to the letter, in June the fund acquired a $3.5 billion stake in the company and pointed out four ways to improve the company’s value: “1) set a specific margin target; 2) increase leverage to return more capital to shareholders; 3) reshape the portfolio; and 4) monetize the legacy stake in L’Oréal.”

Third Point praised Nestle SA (ADR) (OTCMKTS:NSRGY)’s plans to sell assets and provide a margin target of 17.5% to 18.5%. In addition, Nestle’s management has expressed a commitment to reaccelerate revenue growth to mid-single digits and to launch a CHF20 billion ($20.21 billion) stock buyback. In this way, Dan Loeb and his team believe that Nestle SA (ADR) (OTCMKTS:NSRGY) could reach double-digit EPS growth by 2020.

Disclosure: None