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# March 18, 2015

Dear GO Investor,

## Performance and Top Holdings

Set forth below is the Glenview Opportunity Funds performance through December 31, 2014.

Q1 Performance

Q2 Performance

Q3 Performance

Q4 Performance

Gross

Net

Gross

Net

Gross

Net

Gross

Net

Gross

Net

8.92%

7.14%

12.43%

10.11%

1.59%

1.32%

5.29%

4.41%

31.00%

24.80%

8.99%

7.19%

12.48%

10.15%

1.39%

1.16%

5.84%

4.87%

31.57%

25.25%

Equity

Equity

Credit

Credit

Long

Short

Long

Short

Total

17.91%

-12.86%

0.17%

0.08%

5.29%

18.37%

-12.82%

0.20%

0.09%

5.84%

## GLENVIEW OPPORTUNITY FUNDS

Our portfolio returns were positive for the quarter driven by the following1:
i)

Our equity long portfolio contributed +17.91% to gross returns. By name, the top five winners for the
quarter were VCA, Monsanto, Thermo Fisher, Fidelity National Financial and Dollar General. By sector,
the best performing sectors during the quarter were Consumer Cyclical, which contributed +4.83% to gross
returns, Healthcare, which contributed +3.28%, and Technology, which contributed +2.35%.
ii) Offsetting these gains were losses of (12.86%) in our equity short positions, both from individual names as
well as from equity index hedge positions.
*

Flatland
Sometime in elementary or junior high school, I was assigned to read the book Flatland, or some childrens
derivation of the 1884 classic. I use the word assigned because I was not a pleasure reader (oxymoron for kids),
and Im not sure if it was assigned for an English, Math or Science class. Oddly enough, I still remember the basic
tenets of the book, which were to try to explain things like the fourth and fifth dimension, concepts that are difficult
to grasp. The logic trail went something like this:
i)
ii)
iii)
iv)

If you grab the inside of a point and pull, you get a line.
If you grab the inside of a line and pull, you get a plane or triangle.
If you grab the inside of a plane and pull, you get a cube or pyramid.
If you grab the inside of a cube and pull, you have now entered the fourth dimension.

The performance attribution figures refer specifically to the offshore trading fund within the Opportunity product, i.e.
Glenview Offshore Opportunity Master Fund, Ltd. Past performance is not indicative nor a guarantee of future results.
Please refer to Exhibit A attached hereto for important disclosures relating to performance data, highlighted securities,
benchmark comparisons and forward looking statements, opinions and projections contained in this letter.

As a kid, I was right there with the auth
hor until the lasst part. As an aadult, Im still in the same place: I follow tthe
logic of thee analogy, but Im still confu
used. While I finished
f
calculuus and had my fill of higher llevel mathemattics in
pursuit of my
m engineering
g degree at Pen
nn, most of thee math we use tto make moneyy at Glenview is somewhere
dvanced algebrra and probabillity/statistics. We focus on tthe reasonably simple, tangibble and
understand
dable.
On Februaary 3rd, I was in
nvited to speak to the Japan Society about m
markets and invvesting. Whilee I am not an exxpert
in Japan, I did think it waas topical to disscuss the algeb
bra of near zeroo interest rates,, a subject nearr and dear to thhe
hearts of Jaapanese and in
ncreasingly glob
bal savers. Sett forth on the ffollowing pagees are two chartts that are bothh
completely
y obvious and also
a worth starring at, each geenerated on Febbruary 3rd of thhis year.

a
is a simple chart showin
ng what we alll know risk-fr
free rates are exxceedingly low
w and have been
First, the above
marching downwards
d
acrross the globe. While certain
nly there is signnificant risk rem
maining througghout the worldd, it is
somewhat ironic that long
g-term rates were materially lower in early February thann even at the heeight of the crissis in
late 2008 and
a early 2009. Part of this is
i of course refflective of globbal quantitativee easing and the expansion off
Central Baank balance sheeets to buy long
g-term debt seccurities. Still m
more may refleect slowing gloobal growth
prospects coming
c
from China
C
and emerrging markets, as China strugggles with its trransition from an infrastructuure
based econ
nomy to a conssumer driven ecconomy, whilee oil producing nations strugggle with decliniing oil prices.
Finally, thee rise in long-term bond pricees and the com
mpression of lonng-term yields may reflect coontinued flighht to
safety refflecting long-teerm structural fears
f
about the sustainability oof recent grow
wth trends, stronng margins andd
ROEs in th
he U.S. and dev
veloped world.. However, thee following chaart suggests a ppotential additiional phenomeenon.

As you can see in the above table2, despite the relatively paltry buy and hold returns offered by long-term fixed
income securities around the globe, investors have been exceedingly well compensated over the past one, three and
five years with returns many multiples above the annual coupon of the bonds. Said differently, to a bond investor it
has not felt like they were investing for 1-3% returns when they have achieved greater than 10% returns over the
medium term. Ironically, the equity markets are wrestling with the concept that strong recent performance may be
borrowing from future returns as multiples have increased, and yet nobody is talking about the fact that the 31% one
year gain in the 30-year bond has reduced the total profit potential for the remaining 29 years by 40% (the 30-year
compound total return was 146% one year ago and the 29 year forward compound total return is now 88%). Thats
paying it forward.
Lets consider what it would take to perpetuate double digit returns in the 30-year bond from here. In order to earn
10% in the subsequent 12 months from a 2.2% starting point, investors would need to make 7.8% from capital
appreciation on top of the yield. With an approximate duration of 20 years in the 30-year bond, this implies 39bps
of tightening would be necessary, placing the 30-year at approximately 1.8%. Extending this track record three
years forward would imply a landing spot for the 30-year at 1% and, in the middle of 2020, the yield would be 0%,
with 24 years remaining on the bond. As an absolute return manager, its hard for us to get excited about making
absolutely nothing for 24 years. That is Flatland, a line across the page.
While in the last 30 days U.S. Treasuries have backed up to 2.75%, essentially flat on the year after a 12% 32-day
gain and an approximate (12%) 30-day decline, this phenomenon is even more pronounced in Germany, where 30year government bonds yield 0.76% (the 10-year is 26bps). A buy and hold investor will make 25.5%, total,
cumulatively, chain-weighted, over a 30 year period, and if they make 10% a year for two years, they will make 0%
for the remaining 28 years.
Of course, we could have made these arguments one, three, and five years ago, and on average bond bulls have been
right to the tune of 10% per annum. We have maintained a short position in government bonds for the past several
years as a hedge against equity multiple compression, and while the bond hedge has been cheaper than an equity
hedge, it has been premature and therefore wrong. However, what we do know for certain is that at maturity,
holders will only get their money back, and the extraordinary returns enjoyed by bond investors will absolutely end
The Fixed Income Trader Did It!
Because of the dynamics we described above, we logically conclude that holders of sovereign fixed income around
the world fall into one of three camps:
a)

Central Banks, who will get a return on their investment in other ways by promoting economic growth
and investment;
b) Forced holders, who by charter, regulation or simply inertia hold these securities because they dont have
an absolute return mandate but rather have forced conditions upon them (dedicated sovereign debt
products, financial institutions with inflexible, inertial or backward looking investment policies or those
with regulatory constraints that incent holding sovereign debt due to the perception of safety); and
c) Fixed income traders, who simply believe that yields are going lower before higher, and that they will be in
and out before long-term rates rise and bond prices fall. Alternatively, these traders could be momentum
traders who will use price action to determine when the run is over. In either case, they are short-term
players in a long-term instrument.

We left out the fourth category an absolute return manager who seeks 76bps of annual income in Germany or
2.2% annual income in the U.S. Perhaps our ambitions are greater than the average investor, but we know of no
pension fund, health care trust or college savings account that can defease its liabilities and satisfy its obligations
making 1-2% per annum in perpetuity.

The bond returns in the above table are sourced from Barclays Aggregate 7-10yr and 20yr+ Bond Indices.

Consider one additional measure an absolute return investor may consider the risk/reward of holding a Treasury
security. While we believe market volatility is an imprecise and at times misleading indicator of the true risk of a
security, why would someone want to invest in a highly volatile asset for paltry returns? Bond volatility has
approximately matched equity market volatility over the past five quarters, yet we believe it is reasonable to assume
that equities in aggregate will produce a return greater than 2.2% per annum for the next three decades.
A detective is investigating a crime and the suspects are a Fixed Income Investor, a Fixed Income Trader, Santa
Claus and the Tooth Fairy. He immediately arrests the Fixed Income Trader, because all the others are fantasy.
Ironically, regulatory authorities have heavily incented banks to own highly volatile low-return securities and
restricted them from investing in absolute return managers. Well defer to others to fight that battle we are simply
focused on our risk management and absolute return mandate.
Saved By Zero? Aaaaahh!
Earlier we established that the massive drop in Treasury yields has front-end loaded investment returns in long-term
securities and thereby materially diminished future investment returns. In addition, we established that this could go
on for two to five years of additional 10% returns, after which German and U.S. bonds would be yielding zero. In
the Flatland we are comfortable living in, zero is a lower bound, as no absolute return manager we know would
invest their money to get most but not all back. However, that zero lower interest rate bound is being challenged
anecdotally, if not analytically:
i)

Presently, Danish, Swiss and German government obligations all trade with negative yield through 5+
years (Swiss all the way to 10 years).
ii) Mario Draghi, ECB President, indicated that the QE program could buy sovereign debt securities all the
way down to Deposit Rate yields in the EMU, which presently are -20bps. They could also lower the
Deposit Rate Denmark and Switzerland are currently at -75bps.
iii) Nestle recently placed 500mm of bonds that traded at negative yields it is unclear if you get a Crunch
Bar to compensate you for your loss of principal on the investment.
iv) A total of \$3 trillion of debt in Europe and Japan trades at a negative interest rate.
The analytical argument for negative interest rates is as follows:
a)

While it is true that one could earn 0% by holding paper currency, the costs to store, transport and secure
such currency are significant on a large scale.
b) The largest bill in circulation is the \$100 bill, meaning it would take 10,000 pieces of paper to store \$1
million dollars. For institutions transacting millions at a time, the space and logistical constraints are
enormous.
c) Individuals have become accustomed to holding cash in zero interest checking accounts or low return
savings accounts that return less than inflation and thus earn negative real returns. As such, consumers are
already accustomed to negative real rates for payment convenience, and therefore negative nominal rates
are just one more step on a continuum rather than a phase shift.
There is, of course, some lower bound, which would appear to be zero minus inconvenience costs. Beyond that, we
enter the fourth dimension esoteric concepts that we can write about but are very difficult to actually comprehend:
1) Despite all the work on working capital efficiency, suppliers would now push for later collection terms
while purchasers would be incented to pre-pay for goods from creditworthy counterparties. Working
capital management would be turned upside-down.
2) All the formulas we learned in business school blow-up. Good luck computing a dividend discount model
dividing cash flows by (r-g) when r is negative. (I know r isnt a risk-free rate but you get the point.)
Obviously, growth could be pressured in a deflationary environment, but many businesses would retain
absolute pricing power and have infinite value.
3) Banks would become large scale currency storage facilities: perhaps banks could buy public storage and
security companies and see their multiple explode to REIT valuations for storing cash.

Of course, former Fed Chairman Bernanke in 2004 wrote that nominal rates cannot go meaningfully below zero
despite the inconveniences of cash storage:
Because currency (which pays a nominal interest rate of zero) can be used as a store of value, the short-term
nominal interest rate cannot be pushed below zero. 3
Further, the NY Fed posted two successive articles in 2011 and 2012 that made the arguments for a near zero lower
bound (by researchers Keister 11/16/11 and Garbade/McAndrews 8/29/12).
As absolute return managers, we believe that we are best served by staying focused on this math problem in
i) Long-term rates are the chain-weighted summation of a string of short-term rate expectations;
ii) Currencies are the chain-weighted reflection of a string of short-term relative interest rates, in perpetuity;
iii) Risk assets price back of risk-free assets, and thus movement of risk-free assets competes with or incents
capital flows into corporate bonds and equities; and
iv) Risk adjusted, investors will always want more money in the future than they have today.
As such, while we are aware that debt markets can persist at zero or even modestly negative rates for a period of
time, we believe it is best to make capital allocation decisions on the basis that fixed income securities will
eventually trade where a fixed income investor would own them rather than where governments and fixed income
traders will push them. On this basis, we maintain modest net short positions in sovereign and corporate fixed
income, and we remain focused on our secular growth investments that trade at approximately 15x 2015 and 12x
2016 earnings per share, multiples that we find attractive even in interest rate environments that are 100-200bps
higher than we are today.

Source: Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment; from the Finance and Economics
Discussion Series, Division of Research & Statistics and Monetary Affairs, Federal Reserve Board.
5

Shuffling the Decks
A year ago, we shared with you our Big Picture where we made the argument that calendar turns, more often than
not, extend rather than shift the investment environment. As we reached the sixth anniversary of the advance of the
U.S. equity markets off their March 2009 lows, we felt it was appropriate to look at conditions on a historical basis
to determine if the equity markets have similarly borrowed nearly all the risk adjusted returns from future periods.
Rather than focus chronologically, we shuffled the years and sorted them by returns (from negative to then positive
groups of 0-10%, 10-20%, 20-30% and >30%) to see if there are leading indicators that correlate to periods of high
or low risk. Set forth (in small numbers, sorry) is the summary of what we believe are the key indicators:
Growth

Valuation

GDPActual
US
Global
(0.3%) 3.0%
1.8%
3.0%
1.0%
2.5%
4.1%
4.8%

ForwardP/E DivYield
(BegofYr) (BegofYr)
14.3x
3.1%
21.6x
1.8%
21.3x
1.4%
24.8x
1.2%

InterestRates/Liquidity

Inflation/Currency
BrentCrude
(Y/Yavgprice)
34%
2%
(14%)
60%

Inflation
Expectations
1.8%
2.2%
2.2%
2.7%

DollarWgt
IndexY/Y%
(4.2%)
0.1%
5.8%
3.8%

2011
2005
2007

2.1%
4.9%
5.5%

1.6%
3.3%
1.8%

4.1%
4.9%
5.7%

13.2x
16.4x
15.0x

2.1%
1.8%
1.9%

4.3%
4.9%
4.8%

4.0%
4.7%
5.7%

7.5%
6.8%
7.7%

200
(100)

11.0%
9.3%
8.3%

40%
43%
11%

2.0%
2.4%
2.4%

(5.2%)
(1.7%)
(4.8%)

2004
2014
2010
2006
2012

10.9%
13.7%
15.1%
15.8%
16.0%

3.8%
2.4%
2.5%
2.7%
2.3%

5.4%
2.4%
5.4%
5.6%
3.4%

18.1x
15.4x
14.5x
14.6x
11.8x

1.6%
1.9%
1.8%
1.8%
2.2%

5.2%
4.0%
4.6%
4.5%
2.9%

4.5%
3.3%
4.7%
5.4%
3.7%

7.4%
5.6%
9.1%
8.2%
8.4%

125

100

7.9%
11.3%
11.0%
8.8%
10.8%

33%
(9%)
29%
19%
0%

2.3%
1.9%
1.6%
2.6%
2.2%

(4.5%)
2.2%
(4.7%)
(1.1%)
2.1%

1999
1996
2009
1998
2003

21.0%
23.0%
26.5%
28.6%
28.7%

4.7%
3.8%
(2.8%)
4.5%
2.8%

3.6%
3.9%
0.0%
2.5%
4.0%

23.2x
14.2x
11.5x
18.8x
16.0x

1.1%
2.0%
2.0%
1.3%
1.6%

5.1%
6.0%
2.7%
5.9%
5.0%

6.2%
6.3%
7.5%
6.6%
5.1%

10.5%
9.8%
19.4%
8.9%
12.1%

75
(25)

(75)
(25)

5.8%
3.5%
10.9%
5.4%
8.9%

39%
21%
(37%)
(33%)
16%

2.5%
3.0%
1.6%
2.3%
2.1%

(0.9%)
2.3%
4.1%
8.6%
(6.0%)

2013
1997
1995

32.4%
33.4%
37.6%

2.2%
4.5%
2.7%

3.3%
4.2%
3.4%

12.7x
15.9x
12.2x

1.9%
1.6%
2.2%

3.0%
6.7%
6.0%

2.7%
7.0%
8.7%

6.1%
9.5%
11.3%

25

11.9%
5.2%
2.9%

(3%)
(7%)
8%

2.0%
2.6%
3.0%

0.1%
5.3%
(2.7%)

2015

3.0%

3.8%

16.4x

1.9%

2.8%

3.1%

6.6%

11.3%

(47%)

0.9%

14.0%

30yr
4%orlower
22.1%

IG
4%orlower
16.0%

HY
8%orlower
11.6%

Cash
10%orgreater
17.6%

Oil
Down20%ormore
27.5%

AVERAGES&P500TSR

Yields(BoY)
(BoY)
5.8%
9.6%
6.4%
12.5%
7.4%
14.5%
7.7%
11.5%

Cash/AssetsExFins
(BegofYr)
8.6%
8.0%
6.7%
5.7%

Year
2008
2002
2001
2000

KEYMACROCONDITION

30yrYield
(BegofYr)
4.5%
5.5%
5.5%
6.5%

Changein
FedFunds
(425)
(50)
(475)
100

S&P500
TotalReturn
(37.0%)
(22.1%)
(11.9%)
(9.1%)

+25to50
Fedhike
0to+75bps
22.0%

Nocloseprecedent

First, the above snapshot is a summary of a spreadsheet that goes far off to the right, where we looked at relative
earnings revisions, valuation multiples, operating margins and other factors that may influence future investment
returns. From there, we summarize that the only clear determinative factors, using the past 20 or 30 years as a
guidepost (we show 20 years, but our conclusions hold at 30 as well), are liquidity and borrowing costs. As shown
in the chart above, in the past few decades, there has never been a down year in the market when any one of the
following conditions have been met:
a)
b)
c)
d)
e)
f)

## U.S. 30-year begins the year below 4%

High Yield bonds below 8%
Cash as a % of assets for non-financials is above 10%
Fed tightens 0-75bps (which is present expectation)
Oil falls >20%

Every time one of these conditions has existed, the market has produced positive returns. To be clear, we are not
making a market call, nor are we advising you to go levered long the stock market at these levels. Rather, we would
simply observe that the current conditions appear to be, at a minimum, no more risky than normal as measured by
liquidity and falling commodity costs, and it would have to be different this time, in fact different all six times, for
the market to decline in 2015. There are of course new variables: mid-teens dollar strength vs. other currencies,
global weakness and the aforementioned negative interest rates in parts of the world, and each of these could
introduce new risks to capital preservation in the equity markets. However, as a whole, we continue to find comfort

N/A

in the Fab 5: reasonable valuation (though less cheap than a year ago), positive economy, deep and cheap credit
markets, average or lower systemic risk and highly engaged shareholders as a community of owners. While we
believe debt markets are largely unattractive and inappropriate for investment, leading to our net short credit
position, we remain constructive on the domestic equity markets as a whole and our portfolio companies in
particular.
We remain focused on finding convertible equities with positive value creation optionality, and we continue to
encourage our companies to capitalize on this historically low rate environment to access long-term, semi-permanent
debt capital to reinvest in capex, M&A and share repurchase. Our net equity exposure remains slightly elevated
versus our long-term history reflective of the constructive environment, and we retain hedges in both rates as well as
the euro to protect against the negative translation effect of a stronger dollar on our U.S. based multinationals. We
enter 2015 with a positive outlook for our portfolio holdings and a strong belief that we will continue to find fresh
investments that meet or exceed our return on capital requirements. Set forth below is a selection of both some
newer holdings as well as updated thoughts regarding longer-term positions that we have not written about in some
time.
Auto Dealers: Driving Value Through Service and Capital Allocation
During 2014, we initiated investments in five of the six public auto dealers. The algebra of automotive dealers is
reasonably straight forward:
i)

38% of gross profit comes from the sale of new and used vehicles:
\$2,200 average gross profit from new vehicles
\$1,800 average gross profit from used vehicles
ii) 22% of gross profit comes from F&I, commissions associated with the finance and insurance of cars:
\$1,200 average gross profit from all vehicles
iii) 40% of gross profit comes from service, which is principally focused on cars sold within the past five
years:
This equates to \$2,200 per annually sold vehicle
If one assumes a 5-year service life, this means that they make \$440 per vehicle in force
When you add it all up, there is a lifetime dealer gross profit of approximately \$5,400 per vehicle sold. If one
assumes 16M to 17M units is normal in the U.S., then the U.S. auto dealer business generates \$89 billion in gross
profits per year, making it a sizable opportunity. The industry is highly fragmented, and in fact, the top ten
dealerships in the country represent less than 10% of the overall industry.
While the industry is clearly cyclical, with 60% of gross profit coming from vehicle turnover both new and used, the
secular growth opportunity for attractive capital allocation and future consolidation to drive scale efficiencies makes
this a defensive growth cyclical (another oxymoron). In any one year, there will be economic sensitivity. Over
time, the industry should grow modestly but the scale players should grow significantly faster driven by scale
efficiencies and the productive use of free cash flow.
The severe recession in 2008/09, and the extremely slow recovery in auto sales that ensued, caused a double
whammy of headwinds for the industry:
a)

Constrained financing not only impacted new car purchases but used car transaction volume as well,
thereby impacting the entire 60% pie that is transactional.
b) Because new car sales were weak for a prolonged period, the installed fleet aged and the stock of 0-5 year
old cars shrank materially, causing a reduction in the opportunity set within the 40% of the portfolio that is
service oriented.

As such, not only has the recent recovery led to stronger transactions and new car sales, but the corresponding fleet
refresh is also causing double digit gains in service revenues and gross profits as the pendulum swings back to
normal. This growth on growth impact is what caught our attention and made us more excited about the industry
over the medium term.

There are other structural tailwinds that we find attractive to the industry:
1) Increasing complexity drives service back to dealerships from small independent service shops;
2) A coming wave of off-lease vehicles should drive enhanced affordability and therefore volume of
transactions in the used car space in the coming years;
3) There is an exceedingly long pipeline of bolt-on M&A opportunities 75% of U.S. new car dealerships are
owned by single families with proprietors in their 60s and 70s; and
4) Many of the publicly held companies in the space have also used opportunistic share repurchase as an
additional accretive capital deployment technique, and dry powder in the space remains quite strong.
Despite the success of many of these investments in the past year, we continue to find the group compelling at 12x
our 2016 earnings estimates on average.
We Bought the Group, But If You Prefer One: Group 1 Automotive (GPI: \$78)
GPI owns auto dealerships in the U.S., UK and Brazil, and 94% of their profits come from the U.S. Our interests in
GPI are consistent with our overall industry theme, and the company has shown recently accelerating growth trends:
i)

The companys U.S. parts and services same store sales growth steadily accelerated through the year
ending at 7% in 4Q, which we expect to further accelerate going forward.
ii) Used car sales ended the year with a particularly strong fourth quarter, growing units 9% and gross profit
per unit 8% leading to 17% gross profit growth. While we expect growth rates to cool from these levels,
we believe growth will remain at highly attractive levels over the medium term.
iii) GPI allocates capital well through both acquisitions and repurchases:
a) The company acquired 27% of revenues in the past two years at highly accretive multiples of
recurring cash flow
b) GPI reduced share count by 9% in 2014 with attractively valued share repurchases.
iv) The companys recent entry into Brazil is currently loss-generating (modest losses of \$0.03 per share) and
therefore not valued in the current P/E. We believe Brazil could generate up to \$0.50 per share of value,
which at 12-15x earnings creates about 10% additional value on the stock today that is currently hidden.

With \$8 of EPS power within reach for GPI in 2016, a 15x multiple would generate a \$120 stock price target and
more than 50% upside from todays levels.
Continuing to Flex its Muscles: Flextronics (FLEX: \$11.41)
Weve written about Flextronics in prior quarterly letters (2011 and 2013) where weve described how Flextronics,
as an Electronics Manufacturing Services (EMS) provider responsible for the assembly and production of equipment
and devices, has a more attractive businesses than their branded customers, particularly those on the technology side,
as theyre able to choose among winners and losers which allows their business, over time, to prove more
stable. Despite the stocks 44% rise in 2014, we continue to be the companys largest holder and believe Flextronics
is set to outperform again in 2015, driven by the following factors:
1) Improved execution and credibility. As we noted in our 2Q 2013 letter, Flextronics promoted Chris
Collier, its longtime VP of Finance and Chief Accounting Officer, to Chief Financial Officer in May 2013.
This was followed by a marked improvement in operating results: prior to Chris promotion, the company
had been amidst a period of uneven operating results, which had materially impaired investor confidence;
since then, the company has met or exceeded its revenue and earnings guidance in every one of the seven
successive quarters. We expect continued attainment of its earnings commitments to be an important future
driver of Flextronicss stock performance.
2) More attractive business mix. Five years ago, we estimate almost 80% of the companys revenue and 70%
of operating profits came from its two shorter cycle businesses manufacturing telecom equipment and
consumer electronics including about 15% from the combination of producing cell phones for Research
in Motion (known as Blackberry today) and PCs for various global OEMs; both of those revenue streams
have since gone to zero. Today, about 30% of its revenues and a full 50% of profits come from the longcycle High Reliability Solutions (HRS) and IEI (Industrial and Emerging Industries) groups. These

3)

4)

5)

6)

7)

segments manufacture products for customers in the medical, automotive, aerospace, general industrial and
energy industries, among others, all newer and later adopters of outsourced production. On the back of
continued healthy double digit revenue growth rates, these businesses should, by our estimates, account for
36% of revenue and 55% of operating profits in two years. Further, were Lenovo to insource the
production related to its recently acquired Motorola Mobility operation, an immaterial impact to
Flextronics earnings that is well understood by investors, HRS and IEI would be over 40% and almost 60%
of Flextronics revenue and operating profits, respectively, in two years.
Coming cyclical lift from telecom capex trends. Flextronics should also benefit from a modest cyclical
rebound in its INS segment, which accounts for 30% of profits. While this segment is fairly diversified, its
still somewhat sensitive to cyclical telecom capital expenditure trends, which remain relatively depressed
and should improve towards the back half of calendar 2015. As a proxy, capex for AT&T fell 15% on a
year over year basis in the second half of 2014 after growing 20% in the first half on the back of that
companys heavily front loaded spending pattern. While AT&Ts full year 2015 capex guidance calls for
full year capex to fall 16%, its guided intra-year trajectory suggests spending growth by 4Q15. While our
long-term expectations for the INS business remain relatively sober, we do expect its revenue trajectory to
improve from the -7% trend of recent quarters (notably half of this decline is driven by FLEXs decision to
de-emphasize set-top box production) which will have acted as an approximate 2% earnings headwind to
total company results this year to closer to flat over the next year.
Still sharp capital deployment. Flextronics remains a reliable repurchaser of its own shares. By the time
this fiscal year draws to a close in two weeks, over the preceding five years the company will have
repurchased about 36% of its shares driving 25% net share count reduction at a total cost of over \$2
billion. Flextronics domiciliation in Singapore would normally limit it to repurchase 10% of its shares
annually. But the company has specific approval from the Singapore Ministry of Finance to allow it to
repurchase a full 20% of its shares in any given year. We continue to have a healthy, constructive dialogue
with management on this topic. With net debt to LTM EBITDA of just 0.3x, no debt maturities until 2018,
and expected next-two-year free cash flow generation of \$1.5B, or 22% of its current market capitalization,
we expect Flextronics to use both its free cash flow and potentially its balance sheet to create meaningful
shareholder value via repurchase and strategic acquisitions.
Still latent margin opportunity. Flextronics new CFO has been less rigidly focused than his predecessor on
expanding operating profit rates, instead centralizing the organization on consistently delivering healthy
operating profit dollar growth. In that vein, weve seen operating profit dollars grow by a full 14% in this
most recent fiscal year and at a compound annual growth rate of 11% over the last two years. Despite that
pivoted focus, the new CFO still does plan on delivering operating margin rate accretion over time, even
publicly communicating segment level margin targets for each business. Were Flextronics to achieve just
the low-end of each of those segment targets, the companys earnings per share would be 12% higher than
our model for the next fiscal year; and at the midpoint, our earnings would be 38% higher.
Consensus expectations that can be met or exceeded. Analysts model Flextronics earning \$1.20 per share
for its fiscal year ending March 2017, or a 6% compound annual growth from the \$1.06 it will earn in fiscal
2015. With revenues accounting for 50% of its profits growing double digits, a coming modest recovery in
its cyclical INS segment, some independent margin lift expecting from efficiency improvements and a
likely repurchase of almost 20% of its shares over that two year period, that 6% annual growth rate should
Exceedingly cheap valuation. Despite its healthy appreciation over the last two years, Flextronics stock
still trades at just 10x 2015 EPS expectations and 9x 2016, egregiously cheap by any measure, especially
when viewed in the context of its sharp discount to the market. Even a 13x multiple on our calendar 2016
estimates still a 15% discount to the market would make Flextronics worth \$17 per share or still about
50% upside from here; and a sharply discounted 11x multiple would yield a still healthy 25% one-year
return.

## Shares Now Offered on the Value Menu: McDonalds (MCD: \$96)

McDonalds is the market share leading quick service restaurant with over 36,000 restaurants and is the dominant
player in the largest sub-category focused on hamburgers. The company is well diversified geographically
generating approximately 44% of profits in the U.S., 41% in Europe and 15% primarily in Asia. The majority of
McDonalds restaurants are operated by franchisees that pay approximately 4% of sales as a brand royalty and, in
the cases where McDonalds also owns the real estate, also pay approximately 9% of sales as rent. Disappointing

operational execution oveer the past two
o years that has driven a toplinne decelerationn and a failure to more efficieently
structure th
he business hass led to materiaal underperform
mance compareed to peers as m
measured overr a one, three annd
five year tiime period. Th
his is currently manifested in a sector-low vvaluation, and ssentiment as measured by ssell
side Buy ratings is att a ten year low
w. We believe this has create d an opportuniity to purchasee a high qualityy
nd the opportun
nity is exceedin
ngly attractive when combineed with a freshh management tteam
that has thee ability to takee a number of value
v
enhancin
ng actions.
Fundamentally, McDonaalds has a num
mber of characteeristics that wee look for in goood businesses. Approximateely
75% of EB
BITDA is driveen by royalties and rent, which is a secure, sstable earningss stream free off operating leveerage.
Food, in geeneral, is a deffensive end marrket, and McDonalds positiooning at the vallue end of the spectrum provvides
further insu
ulation from material
m
cyclicaality as evidencced by positive same store salles in the U.S. and positive
consolidateed EPS growth
h in every year throughout thee last recessionn. Scale is a coompetitive advantage that alloows
for an adveertising budgett unrivaled by peers,
p
and purcchasing leveragge over supplieers helps drive its strong valuue
proposition
des of billions of dollars of addvertising capeex have createdd one of the moost
valuable brrand assets in the
t world, whicch contributes to strong unit eeconomics andd productivity pper store
approximaately twice the level
l
of peers. These charactteristics easily justify the curr
rrent valuation and thus proviide a
backstop; however,
h
we in
nitiated our possition based on
n the belief thatt the new CEO
O with the assisstance of a
cooperative Board will un
nlock trapped value
v
by pursu
uing some comb
mbination of thee menu of optioons shown beloow
(were hop
ping for the Hap
ppy Meal enco
ompassing all five
f courses)!

1) Operational
O
turn
c
continnued to generatte positive sam
me store sales inn
20
013 and 2014, McDonalds same store saless turned negatiive as a result oof strategic missdirection,
op
perational ineff
fficiencies and disenfranchiseed franchisees. We believe eaach of these thrree componentts is a
so
olvable problem
m, and our prop
prietary researcch in the channnel and converrsations with m
management sugggest
th
me store sales
grrowth. We exp
pect the strateg
gy to pivot to become more cuustomer focuseed as evidenced by recent foood
qu
uality improvements and the reduction in th
he regional layeer of the organnization, whichh will allow forr
grreater localized
d decision mak
king closer to th
he customer. A simplified m
caalendar should drive operatio
onal efficiencies as well as im
mprove the custtomer experiennce. Importantly, we
allso believe the change in man
nagement has catalyzed
c
renew
wed enthusiasm
m among the frranchisees thatt will
reesult in better execution
e
in thee field. Franch
hisees may findd further motivvation to improove execution sshould
management
m
tak
ke a carrot and stick to offerin
ng top perform
ming franchiseees company ow
wned stores as ppart of
po
otential refrancchising efforts or stores operaated by underp erforming frannchisees that arre pruned from
m the
sy
ystem.
2) SG
G&A expense rationalization
n. McDonaldss spends \$2.5 bbillion per yearr on SG&A whhich equates to
\$6
69,000 / store and
a compares to
t best in classs peers that speend merely 25%
% that amount on a per store bbasis.
While
W
the company does not provide
p
a high level
l
of visibiliity into this \$22.5 billion annuual spend bucket, we
fin
nd the current spend level diffficult to justify
fy. Even after aadjusting for reeal estate owneership expenses,
hiigher company
y owned mix an
nd higher averaage unit volum
mes, we think thhere is room foor at least \$5000M of
co
ost savings esp
pecially given the
t size of the company
c
whic h should drivee material econnomies of scale.
3) Refranchising.
R
McDonalds co
ontinues to opeerate 19% of itts stores but, paarticularly as ggrowth slows, tthere
arre increasingly fewer businesss reasons to ow
wn and operatee this many com
mpany stores, eespecially wheen it

10

can serve as a distraction or even stunt consolidated profit growth during tough times. Currently,
McDonalds mix is below almost all major peers despite some having demonstrated the viability of a nearly
100% franchise model. Refranchising has a minimal impact on EPS when consummated in a rent-adjusted
leverage neutral basis, but the improved quality of the less capital intensive and more stable earnings
stream has been consistently and appropriately rewarded in the market via improved valuation. Multiple
case studies point to both an immediate recognition upon announcement as well as over time as the plan is
executed, and McDonalds stagnant franchise mix over the past five years has contributed to a valuation
that was at the high end of its peers five years ago but now ranks as the cheapest in the group as others have
capitalized on the opportunity while McDonalds has not.
4) Balance sheet optimization. At 2.6x rent adjusted leverage, the companys current capital structure is
inefficiently conservative when considering the high quality, stable and defensive nature of the business
and a material real estate portfolio that is still presently owned. With accommodating credit markets
providing access to generationally low interest rates, as evidenced by McDonalds 30 year debt yielding
slightly below 4% pre-tax or 2.6% after tax, we believe McDonalds could return approximately 25% of the
market cap to shareholders through the end of 2016 while still maintaining an investment grade rating and
as much as 50% of the market cap if they choose to match the leverage levels of burger peers, QSR and
WEN.
5) Real estate monetization. Unique to the industry, McDonalds owns 45% of the land and 70% of the
buildings for its restaurants. Using the current rental rates McDonalds charges its franchisees, we believe
the earnings power of these real estate assets as a standalone entity would be equivalent to approximately
50% of current consolidated EBITDA. Given that REITs are trading at almost 20x EBITDA, we do not
believe this is reflected in McDonalds current 12x EBITDA valuation, and we believe management efforts
to monetize or illuminate this could unlock at least \$20 billion of value.
While operational changes may not result in an instantaneous inflection as it may take time to get credit from
consumers and the CEO, who just officially assumed his post less than two weeks ago, may want a short learning
period before taking action, we think the shape of events will continue to strengthen over the course of the year.
Operationally, comparisons will ease and headwinds from supply chain issues should fade followed by fundamental
traction from new initiatives. Increased investor interaction with the CEO should help build confidence in the
present and will hopefully be soon followed by a public articulation of managements vision for the company.
Given the exceedingly large potential for value creation from a playbook that has been successfully implemented at
peer companies, a CEO who did a good job running the U.K. business and appears to embrace change and a Board
that has recently moved to an annually elected schedule, we would be surprised to not see material progress made on
the initiatives we outline above, which we believe could support a \$169 price target, making shares of the purveyor
of the dollar menu even cheaper as we see them as 57c dollar bills.
Separating From the Fleet: PHH Corporation (PHH: \$23)
PHH, an outsource provider of mortgage services, represents an extension of our constructive view on housing and
offers significant operational improvement and capital allocation opportunities.
Background
In past years, PHH had operated two sets of businesses its current mortgage services operations and commercial
vehicle fleet management operations. There was seemingly little strategic rationale for these businesses to remain
together, and in March of 2007, GE and Blackstone teamed up to buy the company for \$1.8 billion (\$31.50/share),
with GE planning to retain the fleet management operations and Blackstone planning to retain the mortgage services
operations. While the transaction ultimately fell through with the onset of the credit crisis, it demonstrated the logic
in separating the businesses. Later, after credit markets recovered and PHH repaired its balance sheet, the company
revisited the separation. Ultimately, in July 2014, the fleet management business was sold to a strategic buyer,
Element Financial (EFN CN), for \$1.4 billion, transforming PHH into a stand-alone mortgage services provider.

11

PHHs Go-forward Operations
Today, PHH operates its legacy mortgage operations through two segments Mortgage Production and Mortgage
Servicing. Mortgage Production originates prime mortgages through wealth management, regional/community
bank, affinity and real estate broker channels on both a private-label and branded basis. It generates revenue by
collecting a fee-for-service on loans retained by its PLS (private-label services) partners and selling all other newly
originated mortgages for a gain in the secondary agency market. Mortgage Servicing services loans originated by
PHH or third parties and earns contractual revenue, which recurs for the life of the loans, either through outright
ownership of the MSRs (mortgage servicing rights) or sub-servicing arrangements.
PHH has faced several headwinds in its mortgage businesses in recent years, which have resulted in operating losses
in its PLS channel within Mortgage Production, as origination costs have expanded in the post-financial crisis
regulatory environment and as production volumes declined given the slowdown in refinancing activity that began
in late 2013. These headwinds have necessitated leaner operations, better terms for PLS contracts and greater scale,
all of which management has sought to address through a series of initiatives categorized either as re-engineering or
growth initiatives.
Re-engineering & Growth Initiatives
PHH management expects its re-engineering initiatives, which are comprised of (i) expense reduction actions
(organization redesign, process improvements, vendor management, and facilities consolidation) and (ii) PLS
contract renegotiations, to generate \$225M of pre-tax operating benefit, or \$2.06 per share, on an investment of
\$200M. 50% of the PLS contracts have been successfully renegotiated, with another 30% expected to be completed
by mid-year 2015.
PHHs growth initiatives, which are aimed at increasing its scale through both organic and inorganic means, are
expected to generate \$175M of pre-tax operating benefit, or \$1.60 per share, on an investment of \$150M and are
targeted to be completed by 2017. Growth opportunities include incremental originations sourced through greater
penetration of existing PLS partners mass affluent customer bases, new regional/community bank relationships,
real estate services channel expansion and retail branch development. In addition, for Mortgage Servicing, the
company is targeting subservicing acquisitions.
Outside of managements growth initiatives, PHH will benefit from cyclical and secular tailwinds off of the
industrys reset base. Increasing home sales volumes, home price appreciation, loan-to-value increases and a
declining share of cash purchases should drive growth in purchase mortgage originations. Additionally, PHH should
benefit from declining foreclosure expenses as we move further away from the financial crisis. Further, PHH would
benefit from interest rate increases, as it earns interest income on the approximately \$3B it holds in escrow accounts
as part of the servicing business. Lastly, the current regulatory environment should cause more small banks to
outsource mortgage production functions as they can no longer maintain them in-house cost efficiently due to rising
compliance costs.
Excess Cash
Following the sale of its Fleet business, PHH had a significant excess cash position. After deploying \$435 million to
retire debt and setting aside cash for working capital and ongoing liquidity preferences, PHH had excess cash of \$1\$1.1 billion. Of this amount, \$350 million was set aside for its re-engineering and growth initiatives, collectively,
leaving \$650-750 million available for deployment to shareholders, or 37-43% of its pro forma market
capitalization. The company has announced plans to repurchase up to \$450 million, with an accelerated share
repurchase program for \$200 million of the total expected to be completed this quarter. As the company advances
further through the \$450 million allocated to share repurchases, we expect management to address plans for the
remaining \$200-300 million of excess cash.

12

Earnings Power & Price Target
Building off of a base of negative earnings in 2014, we see earnings power at PHH in excess of \$4 per share in 2017.
Bridge to 2017 Earnings Power
+0.23 Reduction in foreclosure expense
+0.34 Interest savings on debt retirement
+0.44 Interest on \$3B escrow holdings (based on forward curve)
+0.68 Re-engineering expense reductions organization redesign and facilities
+0.52 Re-engineering expense reductions process improvement
+0.40 Re-engineering expense reductions vendor management and consolidation
+0.37 PLS contract renegotiations (80% of target)
+0.80 Growth initiatives (50% of target)
+0.58 Mortgage market growth at ~10% CAGR
+1.02 Share repurchases
\$4.10 2017 Operating EPS
PHH offers upside of over 100% within two years to \$50 per share, or 12x 2017 operating earnings. As we get into
the back half of 2015, with further capital allocation, much of the re-engineering expenses harvested, earnings
turning positive and growing quickly, and potentially some of the growth initiatives realized, investors should better
appreciate the value in PHH.
Combination Therapy: Specialty Pharma Consolidators
We initiated positions in Endo and Actavis in 2014 in part as a thematic investment in specialty pharma
consolidation. We invested in Endo a little over a year ago, and Actavis a few quarters ago, and remain excited
about the outlook for both names. Beyond the shared theme of sector consolidation, both companies have specific
characteristics that make them attractive investments.
Pharmaceutical companies invest a great deal of money in early-stage development of new drug candidates. The
vast majority of these companies have no secret sauce or advantage in basic research, and unsurprisingly, the vast
majority of these research efforts fail, destroying shareholder value. Further, this legacy pharma model relies on
significant selling and marketing costs, which translate mid-80% gross margins into 23-30% profit margins.
In contrast, the consolidators companies such as Actavis and Endo can cut negative/low ROIC research and
acknowledge that this basic early-stage research is best left to academic labs and startups. Further, they focus on
lucrative specialty niches that require limited sales and marketing spend and acquire drugs that can be layered onto
the existing selling and marking chassis, such that they can eliminate significant SG&A spend from assets acquired.
These spec pharma consolidators operate at 50%+ EBIT margins and create additional value through their taxadvantaged acquisition platforms as both companies are foreign and thus have significantly lower taxes. In the
end, Actavis and Endo are platforms that can drive significant shareholder value through consolidation of inefficient
operators. Further, we see excellent risk/reward just on the standalone organic growth profile (and if no strategic
acquisitions present), as each company is driving durable organic revenue and earnings growth.

Adjusts for \$67 million of one-time expenses identified in PHHs 4Q 2014 results supplement; diluted shares are based on a
stock price of \$50.

13

Financials
Revenues
Gross Margins
R&D
SG&A
EBIT
Tax Rate
Net Income
Capital
Structure

Legacy Pharma
Organic growth driven by pipeline;
"Feed the beast" mentality
Mid-80% of sales
~20% of sales;
negative ROIC
~35-40% of sales;
large primary care sales forces
~25-30% margins
~25%; frequently large offshore
cash balances that are unusable
~20-25% margins
Underlevered/overcapitalized

Specialty Pharma
Growth driven by acquired marketed
or late-stage products
Mid-80% of sales
~5-7% of sales;
low-risk, late-stage R&D only
~20-25% of sales;
lean structure and focus on specialty products
~50-55% margins
~15%: frequently inverted
into a tax-efficient structure
~40-45% margins
Deploys balance sheet
for value-creating M&A

## Management is the Active Ingredient: Actavis (ACT: \$288)

We invested in Actavis in mid-2014, shortly after it completed the acquisition of Forest Labs. Between 2011 and
2014, ACT transformed from a mid-size generics company with \$1B in EBITDA to a majority branded (70% of
EBIT) company with approximately \$4B in EBITDA. Actavis management had set an EPS goal of \$20 in 2017 that
we felt they could reach a year earlier with modest capital allocation, implying 30-40% upside in the name. We also
felt that in addition to being significantly undervalued on its base business, ACT had three unique call options:
1.
2.
3.

An acquisition by Pfizer that could enable Pfizer to redomicile to Ireland for tax purposes;
A white knight acquisition of Allergan, which was facing a hostile takeover attempt from Valeant; and
The continued consolidation of smaller specialty pharma companies through tuck-in acquisitions.

Of these three, we felt the second one was the most likely, and in November, Actavis did in fact announce the
acquisition of Allergan. Once the acquisition closes, we expect Actavis (a \$120B market cap company post deal
with >\$11B in 2015E EBITDA) to have the best organic revenue and EPS growth in large-cap pharma, with a
branded business that is approximately 85% of profits and limited product concentration or patent expiration risk. As
a result, we continue to regard the stock as significantly undervalued despite having increased more than 30% since
we initially established a position.
Given the highly accretive Allergan acquisition, management has increased their 2017 EPS goal to \$25 per share,
and we see a number of upside levers that could drive EPS as high as \$27. Given that the combined company has a
faster-growing, higher-margin, and more durable business, we think it merits a higher P/E multiple of 15-17x,
implying nearly 50% upside over the next 18 months. And lastly, while we clearly like the organic growth story, we
do think a potential acquisition by Pfizer remains a possibility over the medium-term, and regard it as a call option
on our investment.
The Little Ones Grow Up So Fast: Endo (ENDP: \$89)
While Endo and Actavis do share a common theme, we would regard Endo as being in an earlier stage of
transformation than Actavis or Valeant (VRX). As mentioned above, ACT has grown from \$1B in EBITDA in
2011 to >\$11B in 2015E EBITDA and generated a >60% annualized shareholder return. Similarly, VRX has grown
EBITDA from \$1B in 2011 to approximately \$6B in 2015, generating a 58% annualized return for shareholders.
In contrast, Endo is still in the early stages of this transformation. The CEO who has executed on this model
before as COO of Valeant has completed two major deals (including a redomicile to Ireland), four to five smaller
deals, a major restructuring, and the divestiture of two non-core businesses since he joined the company only 18
months ago. In that time, he has already turned Endo from a declining business to a high single digit organic growth
company post-2015.

14

If Endo were to continue to execute on its model and using up to 4x for tuck-in acquisitions (we estimate at 10x
reported EBITDA / 7x synergized EBITDA multiples), it could drive EPS in the \$8.30-8.60 range by 2016, implying
that shares are trading at a 10.5x PE multiple on 2016 earnings power. A 14-15x PE, which we think is conservative
for a high single digit organic revenue grower, would suggest upside of +30-45%.
We also think there is a further blue sky case for Endo worth considering. The bulk of the value creation at ACT
and VRX came from transformational deals such as Warner-Chilcott and Forest for Actavis, or Bausch & Lomb for
Valeant. Large transformational deals like these are unpredictable and are not captured in our estimate of earnings
power above as they would likely require stock issuance, but over the next three years, we think it is much more
likely that Endo executes on a transformational deal than Actavis or Valeant. If Endo is able to match the pace of
shareholder return set by those two companies, a blue sky scenario would imply a share price greater than \$200 by
2017.
Concurrent with the writing of our letter, Endo submitted a topping bid for Salix Pharmaceuticals, which had
previously agreed to be acquired by Valiant. In response, Valiant increased their bid by nearly 10% and Endo
walked away on price. While we understood the attraction of Salix to multiple acquirers, we do not believe the
property is so unique that it should be pursued at all cost. We applaud Endos price discipline and believe there will
Running at a Healthy Pace Before the Final Sprint: T-Mobile USA (TMUS: \$32)
Weve owned a position in T-Mobile USA since June 2013 and increased our stake last December. T-Mobile,
which is majority-owned by Deutsche Telekom, is one of the Big 4 U.S. wireless carriers with a postpaid sub and
service revenue market share of only 12%. We believe T-Mobile offers both an underappreciated runway for robust
multi-year growth leading to an inflection in FCF and also significant strategic optionality that, notwithstanding the
recent move in the stock, doesnt appear to be captured in the current valuation.
Until early 2013, T-Mobile had long been a wholly-owned, orphaned subsidiary of a corporate parent with
competitive disadvantages that led to ongoing share donorship in the U.S. wireless market and significant erosion in
brand. In May 2013, however, T-Mobile emerged as a publicly-traded company through the reverse merger with
MetroPCS and installed new management under the leadership of CEO John Legere. New management attacked the
sources of T-Mobiles structural share loss:
i)

Aggressively deployed LTE, bringing T-Mobile to network technology parity vs. peers for first time in a
ii) Secured the iPhone in April 2013 after T-Mobile had been the only carrier without the device;
iii) Acquired low-band spectrum last year designed to expand and improve T-Mobiles coverage; and
iv) Moved to simplified, more competitive price plans.
Importantly, theyve augmented these fundamental improvements in their network and product offering with a
tremendous job of rejuvenating the brand aided by a creative series of initiatives known as the Uncarrier strategy
designed to (a) attack consumer pain points, (b) address pockets of the market theyd previously underindexed to by
tactically discounting to the asymmetric detriment of AT&T and Verizon, and (c) create a differentiated voice in the
market place. The results to date have been astounding:

~12%+

~14%+

\$10,304

\$6,398

\$5,317

\$5,636

\$7,000

\$7,200

\$9,639

YoYGrowth*

(0.2%)

(3.7%)

(16.9%)

6.0%

24.2%

27.8%

17.3%

Margin

29.0%

29.4%

25.9%

25.2%

28.3%

29.1%

33.0%

34.0%

\$3,023

\$2,651

\$1,077

\$1,319

\$2,450

\$2,650

\$5,475

\$6,065

EBITDACapex

Step#1:
Step#2:
Step#3:

19.6%

## Inves tedins ubgrowth

Dri vingra mpini nEBITDAgrowth
Wil ltra ns la tetomea ni ngful FCF

*CAGRfrom2015guidanceto2017companyprovidedoutlook;NOTE:2015EBITDAmarginsand201517subscriberCAGRimplied.

15

2015StreetEBITDA

2016StreetEBITDA

3/1/15

\$6,642

11.8%

1/1/15

EBITDA

9.9%

9/1/14

1.58%

11/1/14

21.9%

1.69%

7/1/14

9.9%

2.35%

5/1/14

(9.3%)

2.70%

\$9,000
\$8,500
\$8,000
\$7,500
\$7,000
\$6,500
\$6,000
\$5,500
\$5,000
3/1/14

(9.0%)

PostpaidChurn

"NewTMUS"
2015Guidance
2017Outlook
MidPoint HighEnd MidPoint HighEnd
2,700
3,200

1/1/14

2014
4,886

9/1/13

SubGrowth*

2013
2,006

11/1/13

2012
(2,074)

7/1/13

"OldTMUS"
2011
(2,206)

While inveestors have graappled over the last several qu
uarters with thee sustainabilityy and the ultimate profitabilityy/unit
economicss of T-Mobiless recent subscriber momentum
m, the proof is in the numberrs Street EBIT
TDA estimatess have
consistentlly risen, as shown above, with
h current 2015/16 EBITDA eestimates 16%//30% higher thhan where theyy were
in mid-201
13 and likely to
o move still hig
gher.
Looking fo
orward, we believe T-Mobile has visibility to
t robust operaational growth and an inflectiion in FCF:
1) Su
ub Growth: Were
W
confidentt recent sub mo
omentum hasnt been a flashh in the pan. A
Aside from thee
drrivers of recentt success contin
nuing, two new
w factors give hheightened vissibility to sustaained double-diigit
su
ub growth:
a) One-Wayy Optionality on
n Competitive Environment: Competition iin the wireless market, particcularly
late in 20
014, was fierce.. In the midst of that, T-Mobbile added 4.9m
mm postpaid suubs, an amazinng
22% grow
wth, in 2014 with
w 54% of tho
ming in the higghly-competitive 2H14. Thoough
our expecctation is the wireless
w
markett competition w
will remain inteense in an absoolute sense andd
Sprints ability
a
to comp
pete should imp
prove, we belieeve the level off competitive inntensity could
reduce fro
om 2H14 levells and were seeeing some earlly signs of selff-correcting behavior:
We are expecting to grrow EBITDA service
s
marginss this year com
ming off last year, which was a
record for uswe're go
oing to be smarrt, we're not gooing to chase ccustomer net addds or revenuess just
for the sa
ake of counts orr revenues. Wee're going to foocus on profitabbility- AT&
&T CFO, 3/11/1
/15
We say th
his is self-corrrecting becau
use AT&T and Verizon have \$26B and \$35B
B wireless EBIITDA
a large as T-M
Mobiles higherr 2015 EBITD
DA, with wireleess margins of 442%
and 50%,, respectively, that
t they need to protect in orrder to maintaiin their dividennd payout ratioos,
which in the case of AT
T&T was 94% in 2014. Meannwhile, Sprint ended 2014 with 4.7x net levverage
on an EB
BITDA numberr that includes transitory,
t
nonn-cash benefits and ignores prrospective cashh burn.
Further, the
t industry jusst spent \$43B to
t acquire specctrum in the AW
WS spectrum aauction with AT&T
and Verizzon accounting
g for \$28B of th
hat spend, and those carriers should also bee highly-incentted to
maintain their current pricing umbrella in pursuit off a return on thaat capital.
b) 700mhz Spectrum
S
Deplo
oyment in 2015
5: T-Mobile iss now deployinng its newly-accquired low-baand
700mhz frequency
f
specctrum for the first time in its hhistory and willl have this speectrum fullydeployed
d by YE15. This low-band freequency spectrrum, whereby tthe signal from
m the tower travvels
further, will
w allow T-Mo
obile to expand
d its nominal ffootprint from 2265mm to 3000mm POPs andd, even
more notaably, to increasse its marketaable footprint from 230mm tto 290mm POP
Ps:

a
impaccts to subscribeer growth: (i) T
T-Mobile will bbe
This coveraage expansion will
able to addrress ~20% of th
he population (i.e.
( 65mm PO
OPs) for the firsst time from a sstarting point oof
near-zero penetration with
hin that base an
nd (ii) improveed network covverage should bbe a needle-mooving
benefit to ch
hurn levels thaat, though well below peak levvels, still havee room for furthher improvemeent.
2) EBITDA Growtth: As would be
b expected in a subscriber buusiness with ann upfront SAC
C going throughh a
ditions, T-Mobiiles EBITDA inflection laggged subscriber growth. Howeever,
20
015 EBITDA guidance
g
of 24% growth at th
he midpoint annd our expectattion of 27% EB
BITDA growthh
sh
hows that the EBITDA
E
growtth is now here. We see three kkey pillars of E
EBITDA grow
wth moving beyyond
th
he 2015 baselin
ne:
a) Layering in incrementall revenues from
m significant suub growth in bbusiness with siizeable fixed ccosts;

16

b) Normalization of SAC-related spend we do model moderate slowing of sub growth beyond 2015
relative to the above-guidance 4.0mm 2015 net adds in our numbers; and
c) Estimate only ~\$500-600mm of the greater than \$1B in YE15 run-rate operating cost synergies from
shutting down the network of the now integrated MetroPCS will actually be realized 2015 EBITDA .
3) FCF Inflection: T-Mobile has guided to positive FCF generation in 2015 for the first time in its history.
We expect that FCF to rise dramatically over the ensuing years aided by the growth in EBITDA against a
flat-to-modestly declining capex budget. Using EBITDA less capex levels that are actually below the midpoint of managements just-issued 2017 outlook although still above consensus, we believe T-Mobile will
generate \$3 per share in 2017 FCF on a fully-taxed basis, understanding theyre unlikely not to be a full-tax
payer in 2017 as their NOLs should last into 2017/18.
Aside from the T-Mobile standalone case, we continue to believe T-Mobile is a key strategic asset in the U.S.
wireless market. Though we dont know the exact path to value realization, we do know the following to be true:
i) T-Mobile is owned by a corporate parent in Deutsche Telekom in search of value maximization.
ii) DISHs Charlie Ergen has amassed spectrum that eventually needs to find a home to be operationalized.
iii) Number of players experimenting with mobility solutions, such as Google and Comcast, will continue to
rise.
iv) Foreign interest in the U.S. wireless market has remained high as evidenced by Softbanks purchase of
Sprint.
v) Recent spectrum auction implied T-Mobiles spectrum alone was worth ~\$40/share.
vi) Sprints value maximizing outcome remains a merger with T-Mobile, likely to be revisited in the next
administration and likely to be anticipated by investors before then.
What should a business trade at with a great management team, visibility to ongoing operating momentum,
significant EBITDA growth leading to an inflection in FCF, all in the context of being a strategic asset with at least
one known, highly-synergistic bidder looking out just 18-24 months and with a majority-owner that appears to be a
motivated seller? Even after a recent move higher, T-Mobile trades at just 6.4x our 2015 EBITDA and 5.3x our
2016 EBITDA whereas AT&T, Verizon and Sprint currently trade at 6.3x, 7.0x and 7.3x 2016 consensus EBITDA,
respectively, before adjusting for the fact that T-Mobile is now the only carrier where EBITDA isnt currently being
artificially inflated by transitory, non-cash accounting benefits. T-Mobile would still only trade at 6.0x 2016
EBITDA allowing for an illustrative \$6B spend by T-Mobile in the scheduled 2016 broadcast spectrum auction,
where T-Mobile will acquire spectrum on an advantaged basis as the FCC will be pressured to ensure AT&T and
Verizon do not corner the market in yet another spectrum auction, especially after killing the Sprint merger.
The stock trades at 10x our 2017 fully-taxed FCF ex-small remaining NOL and, on that basis, we believe T-Mobile
is a stock that can easily offer returns in excess of our opportunity cost of capital over the next eighteen months,
even in the absence of M&A or other strategic actions that, were they to occur, carry the potential for an acceleration
and an accentuation of value realization.
*

## Liquidity and Risk

The overall liquidity of the portfolio remains excellent. At the end of Q4, the weighted average median market
capitalization of our equity portfolio was \$17.4 billion we note this is a drop from the prior quarter as we harvested
several larger-cap opportunities that reached price targets. We remain in a position to liquidate approximately 50%
of our consolidated portfolio in five days (Glenview and GO) while accounting for no more than 20% of the volume
in any one security. Portfolio volatility in Glenview in Q4 was 24.7%,5 driven by a spike in volatility in early
October. Despite the higher volatility, we chose to ride it out rather than mitigate risk after the fact in midOctober, and we were well rewarded for our patience and faith in the value of volatile long investments such as
Avis, Endo, Actavis and others. For the full year 2014, portfolio volatility was 19.7%, which is below our
inception-to-date average of 28.5%.

The volatility figures refers specifically to the offshore trading fund within the Opportunity product, i.e. Glenview Offshore
Opportunity Master Fund, Ltd.
17

Organization
As of 12/31/14, total assets under management are approximately \$10.6 billion, comprised of \$7.3 billion in
Glenview and \$3.3 billion in GO. As you are aware, we closed the GO product to new inflows early in 2014
because we are sensitive to the balance between asset size, which funds our significant investment in team and
allows us a greater share of voice as significant shareholders, and liquidity, which allows for more efficient entry
and exit surrounding individual positions.
We are proud to announce the following additions to our team during the quarter.
Alexandra Busch joined Glenview in November as a Research Associate reporting to Rami Armon, who runs our
Policy and Economics group. Prior to joining Glenview, Alexandra worked at Goldman Sachs, where she was most
recently a Fixed Income Investment Guidelines Analyst and, prior to that, an Investment Banking Compliance
Analyst. Alexandra graduated from NYU with a B.A. in Political Science magna cum laude.
Glenview is thrilled to welcome back John Kim to rejoin our team as an Analyst in the Healthcare group. As many
of you know, John was called to a higher duty two years ago to serve in the South Korean Army, which caught both
him and us a bit by surprise. As you would expect, John carried out his service bravely and with distinction, and to
our great benefit, he has agreed to rejoin Glenview and pick-up where we left off.
As you know, we are proud of our culture of training and development that has produced a very strong pipeline of
leadership and human capital throughout the years at Glenview. We are proud to announce the following meritbased promotions:
Matt Newman has been promoted to Managing Director on our Healthcare team. Matt joined Glenview in January
of 2010, and he has made significant contributions to the firm during his tenure. His research has helped drive some
of our largest and most profitable positions in 2014. Matts coverage within the healthcare space continues to grow,
and now encompasses the pharma supply chain, managed care, healthcare IT, and pharmaceuticals. We look
forward to Matts continued leadership and success.
Rami Armon has been promoted to Director of Policy and Economics. Rami joined Glenview in September of 2013
and immediately became a valued member of the team. He has centralized and enhanced our research efforts on
matters related to policy, regulatory, and legal. His thorough work has helped add conviction on major themes
across the portfolio. Ramis strong work ethic and depth of knowledge make him an important resource to all our
industry verticals.
Cody Zimmer has been promoted from Research Associate on our Proprietary Research team to Analyst on the
Industrials team working with John McMonagle. Cody joined Glenview in 2013 and since that time has made
significant contributions to the Industrials team. Most notably, he has developed and maintained relationships with
a deep network of executives across sectors as diverse as agriculture and general industrials. With the help of these
networks, the Industrials team has built conviction in several new investments and improved capital velocity on both
the long and short side of the portfolio.
Doug Rogers and Anthony Aiello have been promoted to Co-Heads of European Proprietary Research based in our
London office. Doug is one of the most tenured members of the prop team, joining Glenview in 2011. He was the
leader of our healthcare prop effort building out checks around healthcare utilization and the pharma supply chain.
He also helped to train and mentor new hires over the last few years. Anthony joined Glenview in 2012 and made
an immediate impact through his work on our consumer research. Similar to Doug, Anthony led by example and
helped improve our overall process across sectors. Anthony managed the development of a number of new
consumer checks, including the expansion of our work focused on U.S. retail. We look forward to their continued
contributions as they build out our capabilities across Europe.

18

Daniel Nassar was promoted to Prop Research Associate. Daniel joined Glenview in 2013 to assist with our
healthcare prop research and quickly established himself as a top performer. Daniel now leads our efforts across
some of our most important healthcare related projects including managed care, tools and life sciences.
Chris Venezia has been promoted to Co-Head of Investor Relations and Marketing, working with Elizabeth Perkins,
who has been a Partner since 2011. Chris has been with Glenview since October 2005, initially as a member of our
research team before migrating to an IR role in late 2007. While the timing proved awkward, Chris performance
has been stellar, providing you with strong service and transparency as well as true insight into our positions, risk
and process. Chris has also been instrumental in our marketing activities, cultivating numerous new and productive
relationships for the firm that have formed the basis for wonderful long-term partnerships. We know Elizabeth and
Chris work strengthens your confidence in us, and in turn we have great confidence in and appreciation of Chris
efforts over the past ten years.
Jonathan Danziger has been promoted to Chief Compliance Officer and Deputy General Counsel, assuming the
CCO role from our President and General Counsel, Mark Horowitz. Jonathan has earned the respect of the entire
organization through his judgment, intellect, integrity and work ethic and has quickly grown into the senior
leadership position required of a CCO. He leads our efforts in enhancing, training and documenting our best of
breed compliance program in the U.S and abroad and counsels on a broad range of legal matters. We believe our
strong compliance track record not only reflects our investment in talent and our good faith efforts, but also reflects
the talents of Jonathan and Mark in guiding us forward.
Finally, during the fourth quarter or shortly thereafter, we parted ways with a senior analyst, two analysts and a
trader: Vik Doshetty (Industrials), Shannon Knee (TMT/Services), Christian Sisak (Financials) and Conor Casey
(Europe). We wish them all success in their future endeavors.
Partnership
It is with great pleasure that we announce the promotion of Jamie Helwig, Head of our Consumer Group, to become
a Partner of our firm.
Jamie joined Glenview in 2007. I remember first seeing Jamies resume when he interviewed eight years ago and at
first blush it looked to be the stereotypical perfect resume: Jamie graduated with honors from the Wharton School
at the University of Pennsylvania, where he had a 4.0 GPA in his concentrations of Accounting and Finance. He
worked for several years in the M&A department of The Blackstone Group, where he worked on many deals of
consequence. He was captain of his high schools crew team, and a competitive triathlete completing a half-ironman
at age 15. However, it was one detail that really caught my attention: he worked five summers before his
internships at a family trucking company, unloading freight and as a licensed forklift and power hand jack operator.
Jamie wasnt just a bright kid, he was a worker, and he has embodied that each day at Glenview. He was promoted
to senior analyst in 15 months, became co-head of Consumer in four years and became sole head of Consumer two
years later. Under his leadership, we have developed and trained significant human capital in the group, broadened
our sector knowledge to include video games and rental cars, auto dealerships and dollar stores, and our learning
process continues. Jamie is recognized by his team as a strong and well-organized manager, providing us with a
pipeline of investment ideas and investment talent that will power our future returns.
promotion we look forward to many years of hard work and mutual success together.
*

19

People, Not Things
In our last letter, I wrote a story about my 11 year old son, Ryan, and some of our adventures together. On
December 31st, on vacation in Anguilla, Ryan and I set out on a 34-foot charter boat with two local captains to go
bottom fishing for tropical fish or trolling for tuna or marlin. An hour of bottom fishing yielded only two tiny fish
so we decided to troll north towards Prickly Pear Islands, along a ridge where seas drop from 60 feet to 700 feet,
similar to the canyons we fish offshore of Long Island. About 15 minutes into our journey, we hook up on a big
fish, as line starts screaming out the reel of the back left fishing rod. Ryan goes to work on the fish, with the aid of
both captains, and I reel in the other lines to avoid tangles. We had following seas (waves coming from behind us),
and the boat had an open space to the swim platform and ladder with the captains and Ryan in the back left corner
of the boat and the large fish pulling down on the rod, we started to take on a bit of water given the relative elevation
of the waves and the opening in the boat.
Taking on water is not a crisis in boating because all boats have a bilge pump that pumps water back out. However,
this boats bilge pump failed (or never worked in the first place), and we began taking on more water. Ryan and I
took the rod to the front of the boat, balancing the weight while the crew manually bailed the water from the back
with empty containers. However, the weight of the water we had already taken on kept the boat slightly tilted
backwards, and it became increasingly apparent that it was only a matter of time before physics won out. The
captains called their boat dispatch for help, and they were working furiously to save their boat. However,
recognizing the inevitability of the situation, Ryan and I threw the rod overboard and began the preparations for
evacuation. We got Ryans life vest secured, found all that would float cushions, empty coolers and floating rings
and put them overboard Ryan noticed that there was a self-inflating life boat in the front hold (good call Ryan!)
and that went over too, and then I had Ryan jump first and I jumped right after him. Less than a minute later, the
boat was fully vertical, with only five feet of the bow above water where the air trapped in the forward hold kept it
afloat for its last minutes.
I got Ryan on top of a floating seat cushion, and we then made our way paddling, while holding all that floats, to the
inflatable lifeboat that had floated 50 feet away. We got there at the same time as the two captains, and they knew
how to trigger the self-inflation device. Ryan and a captain got in it was the size of a small bathtub so I thought it
best that I stay in the water next to it rather than crowd in. After ten minutes in the water, we saw our rescue boat on
the horizon and after 15 minutes we were aboard the second boat. The captains and the second boat wanted to spend
time trying to save the capsized boat whose tip was still visible, but then it sank completely, and I was anxious just
to get Ryan back to shore. Five miles off the coast of Anguilla, our boat sank to the bottom of the ocean.
We will never know what type of fish pulled us down. From the location and the fact that it never surfaced, we
think it was most likely a large tuna. Despite marking the spot where the boat sank, the charter company has yet to
recover the boat or our things on it (or so they say).
Once on the rescue boat and headed back, we reflected on what we did right and wrong. First, we did joke that in
emptying coolers to bail we threw our bait overboard, and later jumped in overboard quite literally we chummed
for ourselves, causing my wife to conjure up images of Shark Week. I also realized that I left my phone, wallet,
iPad and even my lucky shoes in a bag on the boat. While the phone and iPad would have nearly certainly been
ruined by the water, my wallet would have dried and my shoes were sentimental. In truth, I didnt even think of
them. In a crisis, all I could think about was Ryan.
Sometimes a scary experience like that causes a person to look at life and reevaluate ones priorities. I couldnt be
prouder that this experience simply reinforced the values handed down to me by my parents and grandparents, and
shared throughout Glenview.
People, not things.
*

Odd coincidence: The Fixxs Saved By Zero song we referenced in the beginning is a song about meditation and
choosing happiness over material things. The B-side to that 1983 record Going Overboard. Aaaaahh!

20

Please save the date of November 12, 2015 for our 15 year anniversary investor day conference in New York City.
We will provide additional details as we get closer to the event.
As always, should you have any additional questions, please feel free to call our investor relations professionals,
Elizabeth Perkins (212.812.4723), Chris Venezia (212.812.4722), Bob Burns (212.323.6544) or Patrik Hansson
(212.323.6547) at any time.

Respectfully,

Larry Robbins
Chief Executive Officer

21

EXHIBIT A IMPORTANT DISCLOSURES AND DISCLAIMERS
This letter does not constitute an offer to sell nor the solicitation of an offer to buy any interest in any investment
fund (each, a Fund or together the Funds) managed by Glenview Capital Management, LLC ("Glenview").
Such offer or solicitation may only be made by delivery of offering documents containing a description of the
material terms of any investment, including risk factors and conflicts of interest. Any such offering will be made on
a private placement basis to a limited number of eligible investors. You should conduct your own investigation and
analysis of Glenview and the Funds. Anyone considering an investment in the Funds should review carefully and
completely the applicable Funds Offering Documents, including the Offering Memorandum of such Fund, the
applicable subscription documents, the applicable Governing Documents and Glenviews Form ADV Part 2, in their
entirety and ask questions of representatives of the Funds before investing.
Gross and net returns assume that a hypothetical investor (i) has been invested in Glenview Offshore Opportunity
Fund, Ltd. (the "Fund") since inception of the Fund and has made no additional subscriptions or withdrawals and (ii)
was allocated profits and losses attributable to "new issues" and any other specially allocated income on the same
basis as all other profits and losses of the relevant Fund. In addition, gross and net returns (x) include reinvestment
of dividends, interest, income and prior performance returns, and (y) reflect the deduction for management fees
(based upon a 2% annualized management fee), and all other Fund expenses. Note, that the return figures for the
Fund refer specifically to the returns for Glenview Offshore Opportunity Master Fund, Ltd. using the
aforementioned methodology.
The net performance figures for any given period take into account an accrual for the incentive allocation, if any,
based upon on a 20% incentive allocation calculation, as of each month-end in such period. The performance data
reflects the actual allocation of the incentive allocation in accordance with the terms of the Fund, which provides
that the incentive allocation is made at the end of a Funds fiscal year (assuming no capital withdrawal prior to such
date).
Past performance is not indicative nor a guarantee of future results.
Actual returns for a particular investor will vary depending upon, among other things, an investors new issue status
and the timing of subscriptions and redemptions. There can be no assurance that the Fund will achieve comparable
results in the future. An Investor could lose all or a substantial amount of his investment.
In addition, note that net returns for 2014 are unaudited.
HIGHLIGHTED SECURITIES
Securities highlighted or discussed in this letter have been selected to illustrate Glenviews investment approach
and/or market outlook and are not intended to represent the Funds performance or be an indicator for how the
Funds have performed or may perform in the future. Each security discussed in this letter has been selected solely
for this purpose and has not been selected on the basis of performance or any performance-related criteria. The
securities discussed herein do not represent an entire portfolio and in the aggregate may only represent a small
percentage of a Funds holdings. The portfolios of the Funds are actively managed and securities discussed in this
letter may or may not be held in such portfolios at any given time. Nothing in this letter shall constitute a
recommendation or endorsement to buy or sell any security or other financial instrument referenced in this letter.
FORWARD LOOKING STATEMENTS, OPINIONS AND PROJECTIONS
This letter contains certain forward looking statements, opinions and projections that are based on the assumptions
and judgments of Glenview and the Funds with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of Glenview or the Funds. Other events which were not taken into account in
formulating such projections, targets or estimates may occur and may significantly affect the returns or performance
of any Fund managed by Glenview. Because of the significant uncertainties inherent in these assumptions and
judgments, you should not place undue reliance on these forward looking statements, nor should you regard the
inclusion of these statements as a representation by Glenview that the Funds will achieve any strategy, objectives or

22

other plans. For the avoidance of doubt, any such forward looking statements, opinions, assumptions and/or
judgments made by Glenview and the Funds may not prove to be accurate or correct.
All forward looking statements, opinions and projections are made as of the date of this letter. The forward looking
statements, opinions and projections expressed herein are current as of the date appearing in this letter only. Neither
Glenview nor the Funds have any obligation, and expressly disclaim any obligation, to update or alter the statement,
opinions, projections and/or other information contained herein, whether as a result of new information, future
events or otherwise. In addition, neither Glenview nor the Funds provide any assurance that the policies, strategies
or approaches discussed herein will not change.
Certain economic and market information contained herein has been obtained from published sources prepared by
other parties, which in certain cases has not been updated through the date of the distribution of this letter. While
such sources are believed to be reliable for the purposes used herein, Glenview does not assume any responsibility
for the accuracy or completeness of such information. Further, no third party has assumed responsibility for
independently verifying the information contained herein and accordingly no such persons make any representations
with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise
indicated, market analysis and conclusions are based upon opinions or assumptions that Glenview considers to be
reasonable.
This letter is being furnished on a confidential basis and is for the use of its intended recipient only. No portion of
this letter may be copied, reproduced, republished or distributed in any way without the express written consent of
Glenview.
ADDITIONAL INFORMATION FOR SWISS BASED INVESTORS
The representative of the Fund in Switzerland is Hugo Fund Services SA, 6 Cours de Rive, 1204 Geneva (the Swiss
Representative). The distribution of Shares in Switzerland must exclusively be made to qualified investors. The
place of performance and jurisdiction for Shares in the Fund distributed in Switzerland are at the registered office of
the Swiss Representative.

23