According to the shareholder letter, Greenlight Capital, L.P., Greenlight Capital Qualified, L.P. and Greenlight Capital Offshore (collectively, the "Partnerships") returned (1.2)%, (0.6)% and (0.8)%1 net of fees and expenses, respectively, in the third quarter of 2011, bringing the respective year to date net returns to (6.2)%, (5.6)% and (6.1)%.
These are the thesis of David Einhorn with the new positions in CBS Corporation (CBS), General Motors Company (GM) and Marvell Technology Group Ltd. (MRVL).
CBS Corporation (CBS)
CBS is a diversified multimedia company with businesses that include a top-rated TV network, digital content production, publishing and outdoor advertising. CBS stands to benefit from growing retransmission fees (payments) by cable operators for the right to carry CBS stations. We believe this income stream could amount to several hundred million dollars of new earnings to CBS annually. The company has also been early and aggressive in pursuing high margin incremental deals with online video streaming services like Netflix to monetize its content library. CBS will also benefit from a broader recovery in advertising markets and what looks to be a big upcoming political cycle. CBS is repurchasing stock and has reduced debt. We established a position in CBS at an average price of $20.79 per share, less than 10x our estimate of 2012 earnings. The shares ended the quarter at $20.38 each.
General Motors Company (GM)
GM is the largest auto manufacturer in the United States. After the business failed under its legacy high-cost structure during the recession, the U.S. government bailed out the company and took over most of the ownership. Last November, GM completed an IPO of about 30% of its stock at $33 per share. The government continues to own about one-third of the company. After the IPO, the shares initially advanced to almost $40 before retreating. When the shares broke the IPO price, we determined that the shares were attractive, but only purchased a small position, believing that there might be a better opportunity later when the government exited the rest of its stock. Instead, during a weak third quarter where the market punished all cyclical stocks, the shares fell well below the price where we planned to add to our position. We decided that the shares were cheap enough that we were more than fully compensated for the possible overhang of the government's stake, and we established a position at an average price of $25.78 per share.
GM is being priced by the market as a cyclical company trading at less than 6x this year's earnings. While some may see it as normal to value cyclicals at low multiples of peak earnings, we believe that 2011 is not a peak and, in fact, is below mid-cycle. Prior to the crisis, U.S. auto sales ran between 15 and 19 million units for many years. While sales have bounced from the recession low to about 13 million units, GM is poised to grow earnings from both a return to mid-cycle volumes, which we estimate to be 15 million units, and from a coming major refresh of its North American product portfolio. The market appears focused on GM's "legacy liabilities." However, the new GM does not have pension and healthcare liabilities that are likely to over-run the company. Instead, GM sits with $33 billion of gross cash which represents nearly its entire current market capitalization. We see potential for GM to begin to return capital to shareholders over the next year. While we are cognizant of the various investment risks that include near-term global economic weakness and the government ownership overhang, we think these concerns are more than priced in at current levels and see significant upside even if the U.S. experiences a very slow "new normal" type of economic recovery. The shares ended the quarter at $20.18 each.
Marvell Technology Group Ltd. (MRVL)
MRVL designs semiconductors that serve as the brains of cell phones and hard disk drives. The Street is bearish because hard disk drives may eventually be replaced by flash memory (SSD, or "solid state drive"), and because MRVL's largest cell phone customer has been Research In Motion (RIMM), a structural loser. In our view, hard disk drives show no sign of disappearing any time soon, and MRVL's position in the SSD storage market is at least as strong as its position in the hard disk drive market. In cell phones, RIMM has already declined sharply as a proportion of MRVL's sales, and MRVL has offset it with growth from new customers. Meanwhile, the shares are cheap at 6x our 2012 earnings estimate net of almost $4 per share in cash. We established our position in MRVL at an average price of $13.35 per share. We expect MRVL to buy back 12% of its stock this year, and still have about 30% of its market cap in cash. In short, this is a well-run company in structurally-defensible markets that is being valued as if it is neither. The shares ended the quarter at $14.53 each.
This is the complete letter (Courtesy of marketfolly.com):