Critique of David Einhorn's Sprint Purchase
Einhorn has been one of the more consistent and successful managers over the last decade. “Since inception in May 1996, Greenlight Capital,L.P. has returned 1,635% cumulatively or 21.5% annualized, both net of fees and expenses.”
Sprint Nextel Corporation (S)
In the fourth quarter letter, David Einhorn wrote: “We also established a new position in Sprint Nextel Corporation (S), a wireless communications provider, at an average price of $4.46 per share. Sprint's disastrous Nextel acquisition in 2005 put the company on a painful downward spiral. We think S is now showing the early signs of a promising turnaround. Dan Hesse joined S in 2005 and became CEO in 2007. He has focused on customer service and improving the handset lineup, which have both improved considerably. This has driven subscriber additions and reduced customer churn. We believe S has a significant margin expansion opportunity as it consolidates two networks. Lastly, we think S' uniquely large spectrum position through its direct holdings and via its interest in Clearwire is a valuable competitive advantage in an industry where spectrum is becoming a scarce resource. We value S at a discounted cash flow value of over $10 per share if management delivers on its targeted savings from network modernization. S shares ended the year at $4.23 per share.”
However, not every hedge fund manager shares his optimism about Sprint Nextel. Amit Chokshi, manager of Kinnaras Capital Management commented about the bear case for Sprint Nextel in his fourth quarter letter:
"When entering 2010, S has a number of tangible opportunities and I felt if the company successfully executed on these, operations would improve significantly and thus yield a better valuation for the stock. S had its chances but I believe they missed what was essentially the one "open year" they had to increase subscribers with a relatively light competitive field. As Q3 and Q4 passed, the window between S and its competition was virtually eliminated. I expect that 2011 will be a year where its deeper pocket rivals like VZ flex their muscles and offer 4G services with other attractive smartphones. S may still pay off handsomely for investors but I felt we had better places to invest and that the outlook for S was getting increasingly more challenging."
It will be interesting to see which hedge fund manager has made the right call on Sprint over the coming year.