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Critique of David Einhorn's Sprint Purchase

January 26, 2011 | About:
matsandalex

matsandalex

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David Einhorn, manager of Hedge Fund Greenlight Capital recently disclosed new positions in Sprint Nextel as one of the largest holdings in his fund.

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.


Rating: 3.6/5 (12 votes)

Comments

Gene Evangelist
Gene Evangelist - 3 years ago
The play in cell is 4G now.

The cell companies are adding a lot of smartphones, iphones, pads, and more tablets than Moses, all which consume gobs of bandwidth.

Sprint has a big data presence and low pricing,

in fact, they are typically the lowest priced provider out there.

This is key for a number of reasons:

first, it gives overall room for price increases and still be competitive;

second, the cell market has been evolving the past 2 years from a market of phone-only, phone-only pricing, which is a price competitive model, to a who-has-the-most-services-for-all-my-devices model, which is not as price competitive in the short term.

Sprints pricing was structured during the old market model,

which has them now underpriced and underutilized for the new market model.

All they have to do is continue doing what they're doing,

add some nice warm and friendly customer service, and price up.

It's conceivable they could increase revenues 15-20% over the next 24 months

with just their existing subscriber base.

David Einhorn is correct to see value there.

Gene Evangelist

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