Of their strategy in general, he said they want to own cheap stocks of good businesses largely in the U.S. “We are more net long equities than we have been in some time, as we believe that many stocks have reached a point where they are simply cheap enough to own even if some trouble awaits us. We are prepared for problems in Asia by continuing to speculate on a much weaker yen. We have hedged the currency on our European equities, and continue to believe that European sovereign bond prices will fall regardless of whether the crisis is resolved through sovereign default or money printing,” he said.
Since the start of the year, DELL’s price has increased 12%. The company’s revenue fell each year from 2008 to 2010, but increased to $61.6 billion in 2011. Net income increased to $2.6 billion in 2011 from $1.4 billion in 2010. It also expanded its profit margins in 2011. Its gross margin grew from 17.5% in 2010 to 18.5% in 2011; its operating margins grew from 4.1% to 5.6%; and its net margin grew from 2.7% to 4.3%.
Einhorn also mentions that half of DELL’s sales come from products other than computers, which may increase as DELL will launch its first consumer table computer in late 2012.
From Einhorn’s letter:
“DELL is a large seller of computer and technology products. We established our position at an average price of $15.53. DELL is another example where the recent business performance has exceeded the recent stock performance. While the computer business is mature, DELL has broadened its offerings over the last few years, so that about half its sales and more than half of its gross profits come from other products. DELL has roughly $7 per share in net cash and investments and currently earns about $2 per share (up from $1.50 in 2010). Accordingly, DELL’s P/E multiple is about 7x, and net of the cash and investments, it is less than 4x. This reflects a valuation usually associated with collapsing businesses. We expect DELL to continue to grow its earnings per share, albeit at a modest rate.
Over the years, DELL has done a miserable job of allocating capital. During the dot-com heyday, when the P/E multiple was sky-high, DELL routinely plowed every available dollar back into share repurchases. After the tech bubble burst and the P/E came down to earth, it opted to hoard cash and pay fancy multiples to acquire growth. More recently it seems to have figured out that buying back stock at nosebleed prices makes no sense, but share repurchases at bargain prices can add real shareholder value. During the first three quarters of 2011, DELL repurchased 7.5% of the company and has the balance sheet to do much more. DELL shares ended the year at $14.63 per share.”
Xerox, maker of document management and digital printing equipment, had record revenue of $22 billion in 2010 and earnings of $606 million, increased from $516 million in 2009. The company also has $785 million in cash and about $10.6 billion in long-term liabilities and debt. Cash flow has been substantial for the last 10 years and reached a record of $2.4 billion last year.
Einhorn had this to say about his new position:
“XRX is a document management provider that entered business process outsourcing when it acquired Affiliated Computer Services (ACS) in February 2010. The combination allows XRX to sell more value-added services to its current customers and apply XRX’s technology to deliver ACS’s services more cheaply. This is our second investment in XRX since the acquisition. The first time, we bought with the stock price around $9.35, and sold with a modest gain over concerns about XRX’s Japanese exposure after the earthquake. That issue appeared fully discounted by the market during the fourth quarter when we re-established a position at $7.61 per share, which is less than 8x estimated 2012 earnings. In the first nine months of 2011, XRX signed a significant amount of new multi-year outsourcing services contracts. XRX has been aggressively cutting costs within the legacy ACS organization. Over the long term, XRX is expecting over 6% revenue growth and 10-15% adjusted EPS growth. XRX expects to spend $1.0-$1.4 billion on share repurchases in 2012, which should make a good dent in the share count given its current equity capitalization of $11 billion. XRX shares ended the year at $7.96 each.”
“Finally we continue to hold gold and gold mining equities, reflecting our concerns that global fiscal and monetary policies continue to tempt fate,” Einhorn said in his letter.
As of the fourth quarter, gold is Einhorn’s third largest position. As of the third quarter, Einhorn owns two gold mining stocks. Barrick Gold Corp. (NYSE:ABX) is a leading international gold producer with low-cost mines in North and South America which Einhorn bought in the third quarter and which has climbed 2% in the last three months. His second is Market Vectors ETF Trust Market Vectors Gold Miner (GDX), which he has held since the fourth quarter 2008 and which has increased 41% over the last five years. The Market Vectors ETF is his fourth largest position as of the end of the fourth quarter. He also owns a large and undisclosed amount of physical gold.
David Einhorn seems to be interested in large-cap, old tech stocks trading at low valuations that have plenty of free cash flow. Here is the complete fourth quarter letter:
To see more of Einhorn’s stock picks, visit his portfolio.