Seagate Technology (STX)
Einhorn’s Greenlight Capital established one new position in the second quarter 2011, Seagate Technology (STX). Seagate makes hard drives that go in myriad devices such as blockbuster movies, enterprise servers and desktop and notebook computers, as well as storage devices such as hard drives, solid-state drives and hybrid drives that go in video surveillance equipment, DVRs, game consoles and home media centers. It was founded in 1979 and in 2008 became the first hard drive manufacturer to ship 1 billion hard drives.
What does Einhorn see in Seagate? He believes there may be prevalent worry in the market that hard drive unit sales could weaken, and flash storage, tablets and cloud storage could all increase, potentially replacing or significantly encroaching on hard disk drive sales.
“Though we don’t expect unit demand to fall anytime soon, the hard drive companies have flexibility in their business models and should be able to adjust their operations to protect profitability should unit demand decrease,” Einhorn says in his letter.
Part of Seagate’s “flexibility in its business models” is its adaptation to new technological trends. As more businesses are storing their information in the “Cloud” to save money by running applications across shared data centers, Seagate has aligned its Unit Storage architecture to meet the demand.
In June, the company announced it launched the “world’s first” ultra-thin 2.5-inch HDDs for ARCHOS tablets and some slim laptops. Since the Apple iPad was launched on April 3, 2010, monthly laptop sales have plunged from 11% growth to a -4% decline in August 2010, according to Morgan Stanley.
Einhorn also sees value in Seagate’s pending acquisition of Samsung’s hard drive operations. Its leading competitor, Western Digital, plans to acquire Hitachi’s hard drive operations, reducing the industry’s players from 5 to 3 and thereby increasing “operating stability,” according to Einhorn.
His shares of Seagate sold for $16.06 per share and he believes Seagate could have earnings power of $3 per share. It trades for $16.93 as of Friday. As of March 31, 2011, technology stocks account for 20.7% of Einhorn’s portfolio, which is down about 5% year to date.
Seagate Technology has a market cap of $7.2 billion, a PE ratio of 10.1, a PB ratio of 3.1 and a PS ratio of 0.6. Last year it generated free cash flow of $1.3 billion, its second high level since 2003. Its operating margin gave cause for concern when it fell to -3% in 2009; in 2010 it jumped to 16%, its highest since 2003. Growth margins are at their peak since 2003 at 28.1%.
Einhorn exited a large and short-lived position in Yahoo!, a stock he purchased only last quarter. At that time, he was drawn to the private companies owned by Alibaba Group, in which Yahoo owned a 40% stake. He reasoned that the value of Alibaba was worth the cost of Yahoo’s shares alone, and that the private companies were essentially thrown in for free.
Shortly after his investment, the truth came to light that Alibaba had transferred Alipay (an online-payments service) to the control of CEO Jack Ma. A lengthy dispute between Yahoo and Alibaba ensued which only fomented the tension between the two companies.
In Einhorn’s words, “The partnership bought Yahoo! earlier this year based on a sum of the parts analysis, which included putting substantial value on its Chinese assets. Shortly after the purchase, the value of the Chinese assets came into doubt as the CEO of the Chinese unit hived-off a valuable subsidiary into a corporation that he personally controls. From there, the finger pointing started going in every direction. This wasn’t what we signed up for.”
Einhorn sold his 8.5 million-share stake for a “modest loss.” He bought it at an average price of $16.63 and on Friday it trades for $15.61.
Aside from its Chinese holdings, Yahoo has some good points in its financial results. Its market cap $20 billion and PE, PB and PS ratios are 20.3, 1.6 and 3.2, respectively. Cash flow last year was $526 million, the fourth year of declines since a 10-year peak of $1.3 billion in 2007. It has cash of about $2.8 billion and about $706 million in debt.
Among Einhorn’s other reported sales are Vicat SA (France VCT), Xerox (XRX), Cardinal Health (CAH), CIT (CITI), MI Developments (MIM), MDC Holdings (MDC).
You can view David Einhorn’s complete portfolio buys and sells here.