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Longleaf Partners Fund’s Bullish on CenturyLink and CNH Industrial

Longleaf Partners Fund, a Memphis-based fund under Southeastern Asset Management, recently released its Q1 2020 Investor Letter – a copy of which can be downloaded here. Southeastern Asset Management was founded in 1975 by Mason Hawkins. Longleaf Partners Fund returned -28.87% in Q1 2020, while the S&P 500 returned -19.60%.

In the said letter, Mason Hawkins highlighted a few stocks and Centurylink Inc (NYSE:CTL) is one of them. Centurylink is a technology company based in Louisiana, that offers network services, security, communications,  cloud solutions, voice, and managed services. Year-to-date, Centurylink stock lost 26.6% and on April 22nd it had a closing price of $9.70. Here is what Mason Hawkins said:

“CenturyLink (-27%, -3.28%), the fiber telecom company, was the largest detractor, despite reporting over $1 of FCF per share in the fourth quarter of 2019. Two sell-side analysts downgraded CenturyLink to a “sell” in the last few weeks of the quarter, with the primary points of concern being the long-challenged consumer and voice business and an expected decline in earnings before interest, tax, depreciation and amortization (EBITDA), as customers within the small and medium business (SMB) segment shut down in the current environment. Our case has always assumed that the “bad” consumer and voice business, comprising roughly one-third of EBITDA, continues to decline every year. The positive growth from the remaining “good” parts of the business comes from segments with long-term growth prospects, like Enterprise, SMB and International connectivity. The SMB business is challenged today by small business customers facing sudden existential threats, and we might see a one-time hit to EBITDA as the company addresses bad credit at these customers. However, this is positively offset by the Enterprise business seeing a significant increase in demand to support remote working and in-home streaming, illustrated in part by the growth of CenturyLink’s video-chat customer Zoom. The company, like many others, has suspended guidance in the current environment, but we believe it is well positioned to come out even stronger than before. The company’s net debt-to-EBITDA is in a much better position than in 2008-09, and it produces over $3 per share in FCF. As noted above, we have a 13-D filed at the company and are actively engaged with CEO Jeff Storey and the board to explore numerous strategic options to bridge the substantial gap between share price and long-term appraisal value.”

In Q4 2019, the number of bullish hedge fund positions on CTL stock increased by about 6% from the previous quarter (see the chart here).

Longleaf Partners Fund’s comments on CNH Industrial

In the said letter, Mason Hawkins also highlighted CNH Industrial N.V. (NYSE:CNHI) stock. CNH Industrial is a global leader in the capital goods sector. Here is what Mason Hawkins said:

“CNH Industrial (CNH) (-48%, -3.21%), one of the world’s largest agriculture machinery manufacturers, was another top detractor for the quarter. CNH reported a weak fourth quarter, which was in line with our expectations given challenging end markets due to US-China trade war, weather and soft commodity prices. However, the company disappointed by revising down the 2020 earnings per share (EPS) guidance by 16% versus what was communicated to the markets in late 2019. CNH has not executed well in recent months, leading to inventory build-up and delay in delivery of cost efficiency targets. The stock came under added selling pressure due to its dual-listing in Italy, which has been one of the worst performing markets in Europe year to date, even though its look-through revenue exposure to Italy is less than 12%. To the positive, the agricultural segment, which represents over 60% of the value, is a relatively essential and stable business that has already been through several years of lean times. Smart capital allocation and improved execution by the company will be key as it navigates through this period. The company made a management change that we support in naming Chairperson Suzanne Heywood interim CEO as they seek to replace Hubertus Muhlhauser and appointing Oddone Incisa as CFO to replace Max Chiara. Heywood also serves as Managing Director at CNH’s majority owner EXOR, and we expect her, together with EXOR CEO John Elkann, to improve leadership and execution.”

In Q4 2019, the number of bullish hedge fund positions on CNH Industrial stock decreased by about 6% from the previous quarter (see the chart here).

Disclosure: None. This article is originally published at Insider Monkey.

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