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Stocks Cheaper Than When David Einhorn Bought

February 16, 2012 | About:
Mara Kohn

Mara Kohn

4 followers
David Einhorn is the president of the value-oriented investment adviser Greenlight Capital. Einhorn graduated from Cornell University, where he earned a BA in government from the College of Arts in 1991.

Mr. Einhorn is recognized as a successful investor for short selling and making contrarian stock picks. He is a superstar in the hedge fund environment because of his timely call on Lehman Brother’s demise and his track record. Since 1996, Greenlight returned about 21% surpassing the market with double digits.

Einhorn started as short seller in Lehman Brothers stock in 2007. He considered the company was under-capitalized and was highly exposed to CDOs wrongfully written down. In 2008, Lehman was in a fragile state. Bearn Stearns had to be bailed out. At a conference in April, Einhorn started to talk in public about his positions. Lehman CFO Callan called Einhorn and during the conversation Callan was given the opportunity to discuss discrepancies between the firm's latest filing and what was discussed during the conference on the filing. Later, Einhorn publicly disclosed what was talked about during the conversation and thus, the Lehman share dropped even more. Lehman reported more than a $2.8 billion loss. Then it went bankrupt.

Now, what about Einhorn's strategy? Einhorn believes that emphasizing intrinsic value will let an investor achieve absolute investment returns and protect capital regardless of market conditions. He is considered an active investor as he tries to interfere in the company´s decisions.

Sprint Nextel Corp (S): S is an American telecommunications company. It operates Sprint, one of the largest wireless telecommunications networks in the United States.

Recently, Sprint Nextel has gone through several problems and the market focused on them rather than on its assets. But given its record, the company will surely be able to recover. With a stable customer base, Sprint should improve margins and reassess its value. Furthermore, a stabilization of the business should also allow shareholders to benefit even if Sprint continues operating alone; consolidates in the industry or gets acquired.

A few months ago, Sprint began to sell iPhones. However, Sprint's management should, based on the contract terms, start selling some sort of exclusive product, particularly when there are two other carriers selling iPhones (AT&T and Verizon). Apparently, Sprint may get some sort of early 4g iPhone before its competitors do. If that is the case, Sprint will be able to gain millions of customers, thus becoming a threat to its peers. There are customers who always want to have the latest version of a product and if they move to Sprint, they will have no reason to leave, especially when customer service has significantly improved.

If I translate this opportunity into figures and Sprint really begins to sell iPhone 4G, it will probably gain 3 million new customers changing from AT&T and Verizon. Besides, an iPhone customer would probably generate about $1,000 of revenue on an annual basis. This would add $3 billion to Sprint´s top-line.

Compuware Corporation (CPWR): Compuware Corporation provides software and professional services that optimize productivity and reduce costs across the application life cycle. Compuware intends to focus on its software business and deliver a superior end-to-end application performance, which the company calls Business Service Delivery.

To focus on Business Service Delivery, CPWR decided to divest the Quality and DevPartner software products. Furthermore the acquisition of Gomez Inc. also helped to expand Business Service Delivery products. APM, including Vantage and Gomez, further boosts the company´s growth. Companies are now investing in web-based applications given top-line revenue growth, improved market share and brand awareness.

In terms of future expectations, management forecasts that the APM and Covisint business units will grow. Professional Services, Uniface and Changepoint solutions are expected to help thanks to the strong revenue growth they have experienced. In 2012, management also expects a positive mainframe environment. According to forecasts, revenue should increase 10% this new year. Most importantly, the acquisition of dynaTrace should boost APM product line.

Last but not least, Compuware has developed its Application Service business strategy to focus on the health care market. CPWR gained new customers. Furthermore hospitals, physicians and governments are willing to establish electronic patient health and medical records, thus computerized databases will be needed to store the information. CPWR has developed healthcare portal and messaging solutions to meet this demand. Compuware also plans to have a smaller but more profitable Professional Services Business.

As regards shareholders, CPWR is making efforts to increase shareholders´ value. In 2010, for example, Compuware repurchased 17.9 million shares at $7.41. Management is targeting a share count of around 200 million as opposed to the current level of 238 million. David Einhorn felt attracted by this commitment of the company to add value to shareholders.

CareFusion Corp (CFN): CFN is a global medical technology company that operates through two segments: the medical systems segment and the procedural solutions segment. CareFusion is present in 20 countries and 25% of the sales come from international activities.

CareFusion is a market leader in many product categories and as such, it has a large base of devices. As customers do not tend to switch brands, CareFusion can easily defend its position.

Thanks to its high-priority devices and recurring consumables revenue, the firm is not widely affected by the hospital spending cycles. Moreover, with the recovery of the economy, the company should be able to improve revenue and margins, as well as make customers turn to high-end product lines.

General Motors Co (GM): General Motors came to live after General Motors Corporation bankruptcy in 2009. GM now operates through 9 brands in five different segments: GM North America, GM Europe, GM South America, GM International Operations and GM Financial.

After the 2009 low, company´s earnings should rapidly grow with the increasing sale of vehicles. There are new models that have been very successful in the market: Buick's LaCrosse and Regal and the Chevrolet Cruze. GM can take advantage of its power to charge higher prices per vehicle in certain segments. This power brings more margins per vehicle and enables the company to offset the decline in light-vehicle sales. Models like Chevrolet Malibu show that GM can directly compete with Japanese and European automakers.

GM has entered into a new UAW contract that provides cost stability through 2015, at least. Now the company is trying to extend its footprint in developing markets such as China and Brazil. In China, for example, sales increased 28.6% and in Brazil, the company reported sales of 657,622 vehicles. Anyway, the company is also trying to launch expansion plans in the United States too. Apparently it will invest almost $2 billion in its plants, located across the country.

As regards quarter results, GM earned $1.7 billion, that is to say $0.95 per share. This increase in earnings can be attributed to a higher demand of vehicles. Furthermore, the company also increased its share in the market to 11.5%.

Legg Mason Inc. (LM): LM one of the largest asset managers with $612 billion in assets. It operates through nine different affiliate groups.

In the last period, Legg Mason has launched initiatives to cut cost, improve its products solutions, develop better investment capacities and expand distribution relationships to enhance efficiency. In 2010, the company launched an initiative to enhance its business model and thus improve profitability and growth. The plan is expected to be completed in 2012 and forecasts reductions in expenses of about $130 to $150 million. In 2011, the most significant part of the plan was completed. It involved the transfer of most of the shared activities to affiliates. In Q2 2012, in fact, the company estimated transition savings of $26 million and expects to increase such amount to $35 million by Q4. The purpose of the plan is to create value for shareholder and clients.

Financially speaking, Legg Mason is healthy. It has a strong cash position and has reported a balance sheet with $1.1 billion in cash and equivalents. Most importantly, it announced a 30% increase in dividend, which was paid in mid 2011. This is really inspiring for investors and shows that Legg is shareholder friendly, permanently focused on developing shareholder wealth. Apart from paying dividends, the company is also repurchasing shares. In the last six months, it repurchased and retired 13.6 million shares of common stock through market purchases. By the end of 2012, the company is expected to buy back $400 million in such stock. These are positive measures.

Legg Mason´s initiatives to expand and improve efficiency, jointly with quarter results that it has been able to maintain along the years are the elements that David Einhorn considered when picking up the stock.

Over the past few years, the company´s long-term funds have been surpassing their Lipper category average on a 3, 5 and 10-year total return basis. Last but not least, net outflows decreased 28% vis-à-vis Q4 2011.

Rating: 3.9/5 (9 votes)

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