In the letter, Einhorn discusses the new Yahoo! position:
“The Partnerships established a new position in Yahoo! (YHOO) at an average cost of $16.93 per share. The company developed an extraordinary anti-shareholder reputation in recent years, beginning with its ill-advised decision in early 2008 to turn down Microsoft’s equally ill-advised (and ill-timed) bid to buy the company for $31 per share. Now, under new management, YHOO has taken some increasingly shareholder-friendly steps. It has given up competing with Google in the web search business, a move which is improving free cash flow by reducing capex and operating expenses. It is using the improved cash flow to step up share repurchases (the company bought back more than 7% of its outstanding shares in 2010). YHOO is also taking steps to unlock value from some of its Asian assets in a tax efficient manner, including its 35% stake in publicly-traded Yahoo Japan.
“YHOO currently has $3 per share of net cash on its balance sheet and has approximately another $8 per share of value in its two minority equity stakes of publicly traded companies in Asia (Yahoo Japan and Alibaba.com). Assigning a conservative valuation (5x current year EBITDA) implies $18 per share for just the core businesses and the publicly traded securities and cash. We believe that Yahoo’s most valuable asset is its 40% stake in Alibaba Group’s still-private holdings, which are separate and distinct from its ownership in the publicly-traded Alibaba.com, which we are essentially getting for free. Among Alibaba Group’s privately held Chinese internet assets is a company called Taobao, which is the leading eCommerce website in China. More merchandise was sold on Taobao last year than on eBay, and Taobao's merchandise sales are growing 100% annually. We would not be surprised if YHOO's 40% stake in Alibaba Group alone was ultimately worth YHOO's entire current market value. YHOO stock ended the quarter at $16.68 per share.”
Greenlight bought shares of Best Buy at $33.33. At the time the letter was issued, the price had dropped to $28.72 per share. Best Buy stock rose slightly on Monday, but has since fallen 2%.
Einhorn also explains his Best Buy position in his investor letter:
“We established three new significant long positions during the quarter. Best Buy Inc. (BBY) operates consumer electronics stores in the U.S., Canada, Mexico, Europe and China. The market is concerned that BBY has reached its growth limits within the U.S. and faces declining video, laptop and television sales going forward. We believe that much of BBY’s recent problems were due to last year being a soft-goods holiday season that was particularly poor for televisions. Over the years we have seen many retailers given up for dead after a weak holiday result, only to recover with a change in fashion or product cycle.
“Bears believe that the internet puts BBY on a path to Blockbuster-video obsolescence. We think that view overstates the risk as there is value in store help, merchandising, service and being able to walk out of the store with your purchase. While BBY’s big box stores in the U.S. are mature (and, in fact, BBY will reduce its footage by a couple percent per year), we believe that BBY has more than offsetting growth opportunities in its Best Buy Mobile concept, international retail, and through additional higher-margin services offerings. In addition, the company currently has minimal leverage and between earnings and working capital improvements should generate almost a 20% free cash flow yield this year. BBY has targeted $1.3 billion of share repurchases this fiscal year, which is approximately 10% of its current market capitalization. The Partnerships established their position at an average price of $33.33 per share, representing a multiple of approximately 10x expected calendar 2011 earnings and less than 8x our estimate of 2012 earnings. BBY stock ended the quarter at$28.72 per share. Based upon the price drop since our acquisition, this has not yet proven to be a good buy.”
Overall, Einhorn’s hedge fund returned -2.5% for the quarter, compared to 8.4% in the previous quarter. Einhorn has said that most of his long stocks outperformed the market, and the decline was due to rising short stocks and negative macro hedges, as well as losses in currencies, interest rates and credit spreads.
To see David Einhorn’s full portfolio, click here.