The three funds under his management avoided the market decline of 2Q10. Each returned 2.2, 1.7 and 2.2% after fees. For the first half of the year, numbers have not changed much: 1.6, 2.2, and 0.8%, respectively. Einhorn attributed his success during the periods to “a conservative and defensive portfolio”. He has maintained a “small net long position” during the period and managed to avoid the market volatility completely.
Einhorn did not detail his thought where the market and economy is heading, other than saying “What will happen next? We have no idea”. His action speaks louder than his words.
Einhorn updated his thoughts on a number of his holdings: The other significant winner during the quarter was our short of Moody’s Investors Service (MCO), which reversed some recent gains and fell from $29./75 to $19.92 per share. The proposed financial reform bill raises the rating agency legal liability more than the bulls expected. Additionally, the Financial Crisis Inquiry Commission held hearings where former MCO’s employees alleged that the company had, in fact compromised ratings quality for market share. This evidence should put meat on the bones of the fraud claims in the ongoing litigation against the rating agencies that is ever so slowly working its way through the courts. We believe that an eventual, but likely, legal loss will have a significant negative impact on MCO shares.
The most significant loser during the quarter was Pfizer (PFE), which fell from $17.15 to $14.26 per share. Though the company announced a strong first quarter earnings result of $0.64 per share, a weaker Euro caused analyst to reduce 2010 consensus estimates from $2.25 to $2.15 per share. Longer term concerns about potential austerity measures in Europe and setbacks on some pipeline products also weighed heavily on the share price. As investors gain confidence in PFE’s future sustainable earnings at these levels, which we believe are attainable, investors may pay a higher multiple of earnings than the current sub -7x.
African Barrick Gold (United Kingdom: ABG) operates gold mines in Tanzania. It was brought public in March through a 25% carve-out by Barrick Gold, the world’s largest gold producer. The Partnership established their position at an average price of £5.72 per share. At less than 6x 2010 EBITDA, a 10% free-cash-flow yield and $200 per ounce of reserves, we purchased ABG at about half the valuation of peer gold miners. The company is well positioned to grow its production over the next five years through a combination of brownfield expansions at existing mines and the development of another large deposit that it already controls. Management incentives are well aligned with shareholders. ABG ended the quarter £6.24 per share.
Apple Inc. (AAPL) is one of the world’s most successful and innovative technology companies. Over the last few years, the company has transitioned from a niche PC hardware and software provider into a more diversified company with market leadership positions in mobile communications and portable entertainment via its iPod, IPhone, and iPad products and the iTunes service. From 2004 to 2010 revenues have grown about 700% or almost 40% per year. Earnings have grown even faster from $0.38 to an estimated $14.00 per share. AAPL has a fortress balance sheet with more than $40 per share in cash and investments. During the recent downturn, the Partnership established a position at an average price of $248.09 per share, representing 15x this year’s estimated earnings net of cash. While growth over the next few years will certainly be slower than it has been over the last few years, AAPL does not appear to have fully penetrated its market opportunities. Accordingly, the opportunity to invest in this leading company (with a better financial profile than market participants seem to acknowledge) appears iTtractive at its current multiple. AAPl shares ended the quarter at $251.53 each.
Ensco plc (ESV) in an offshore contract oil drilling company operating a large fleet of shallow-water jack-up rigs and a small but new fleet of deep water rigs. The Deepwater Horizon oil spill and resulting 6month drilling moratorium in the Gulf of Mexico caused significant share price declines throughout the sector. ESV was not involved in the horrible accident, which should not materially impact the company’s long-term potential. ESV has approximately $7 per share in net cash and a tangible book value of $37.50 per share. The shallow water drilling business, which is unaffected by the drilling moratorium, generates $4.00 per share in en-levered mid-cycle earnings and $8.00 per share in peak earnings. At the Partnership’s average cost of $39.41 per share, we appear to be getting the shallow water fleet at a low value and the deepwater fleet (in which ESV has thus far invested over $15 per share to build and should add $2.00 and $4.00 to mid-cycle and peak EPS respectively) for free. ESV shares ended the quarter at $39.28 each.
NCR Corporation (NCR) manufactures and services automated teller machines (ATM), retail point-of-sale (POS) and self-check-out terminals. The stock has recently been negatively impacted because of large accounting losses on its pension obligations and losses from investments in a new entertainment related business. The items obscure what we believe to be largely sound, strong free cash-flow ATM and retail businesses, poised for solid growth over the coming years from product upgrade cycle. The company’s net cash balance sheet and strong ability to generate additional cash-flow give it the flexibility to deal with its pension obligations. In addition, the entertainment business is expected to be breakeven in 2011 and profitable thereafter. The Partnerships established a position in NCR at an average price of $13.58 per share or under 10x current operating earnings excluding the start-up entertainment related losses and adjusting for the true economics of the pension obligation. NCR shares ended the quarter at $12.12 each.
Read the full text of the letter here.
Check out the long equity portfolio of Greenlight Capital here.
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