We can’t say for sure what David Einhorn’s exact analysis process is, but some of his largest adds of the first quarter still appear undervalued. Einhorn’s Greenlight Capital hedge fund rose 8.8% this year through May 31, 2013 compared to 10% for the S&P 500, and most of his new purchases of the first quarter have appreciated modestly. Given what a proven stock picker Einhorn is, the holdings could still have more room to increase.
Oil States International (OIS)
Einhorn bought 2.7 million shares of his largest new holding of the first quarter, Oil States International, for approximately $78 per share on average. The stock was had been relatively stagnant for several years, as seen in the chart below:
Oilfield provides oilfield accommodations to oil and gas companies, and recently ventured into the mining industry through a major acquisition. Its price rose 40% this past year, boosted by disclosure of Einhorn’s stake.
Looking at the Peter Lynch chart, Einhorn purchased the company when its price line fell significantly below its price at P/E 15 line, indicating it was undervalued. The company still appears undervalued according as of Friday according to this method:
Einhorn bought Oilfields at a P/E roughly between 9 and 10, which is significantly below the industry median of 16.2. Friday the P/E ratio stands at 12.2, higher than 60% of the 177 companies in the global oil and gas equipment and services industry, but still well below the industry median.
The reverse DCF calculator also shows that the market is expecting a growth rate of 7.38% for the next 10 years for the company at its current price. In the past, the company achieved a 17.2% EBITDA per share average annual growth rate for 10 years, making this number seem reasonable:
Though the last month saw the company’s stock rise to its highest price in 10 years, Einhorn still believes it has room to go. In his first quarter letter he commented on the company and set a price target:
We believe that the company trades at a significant discount to the sum of its parts. Though the shares trade at slightly less than 7x 2013 EBITDA (a multiple typically associated with its lower multiple businesses), the majority of its profits come from Accommodations, which is a high-growth, high return-on-capital segment that deserves a much higher valuation. At 8.6x 2013 EBITDA, an appropriate multiple given a sum of the parts analysis of OIS’s business mix and where comparable companies trade, OIS would be worth close to $120 per share. We believe that OIS could unlock significant shareholder value by converting the Accommodations unit into a REIT and separating it from the rest of the company; if completed, it would suggest a valuation of $155 per share.
Hess Corp. (HES)
Einhorn selected another from the oil and gas industry in the first quarter, purchasing 1.245 million shares of Hess Corp. for approximately $65 per share on average. With a 1.4% portfolio weight, this was his second largest new buy. The price has since appreciated a modest 5%.
Hess is a global independent oil, natural gas and electricity company. A Peter Lynch chart of the company shows that it is undervalued, but has become even more undervalued since Einhorn purchased it:
In addition, Hess is currently trading near its one-year low P/E ratio of 8.25 – even lower than when Einhorn bought it.
The current price of $69.08 per share also implies that the market expects an earnings per share growth rate of 1.39% for the next 10 years. In the past 10 years, Hess grew its EBITDA per share at a substantially higher rate of 7.4%.
GuruFocus indicates that assuming the same growth rate and discount rate, Hess has the second lowest margin of safety, at 30%, than its four closets peers.
Spirit AeroSystems Holdings Inc. (SPR)
Einhorn may have placed less of his firm’s funds in companies he found less undervalued. He gave almost half a percent portfolio weight to Spirit AeroSystems Holdings Inc. (SPR) in the first quarter. In total he purchased 1,652,962 shares for $17 on average. The stock has already gained 26%.
Spirit AeroSystems appears overvalued according to the Peter Lynch chart:
The P/E ratio is also high, at 80.2:
Finally, the market expects a 34.26% growth rate in earnings for the next 10 years to justify the current price of $21.80. This company has produced only a 13.9% decline rate on average for the past five years.
However, the company’s financials also in many areas compare unfavorably to its peers in the aerospace industry, and its board of directors in March hired a new CEO with a strong financial background. The new chief, Larry A Lawson, is a former executive vice president of Lockheed Martin Aeronautics business segment.
"The board sought a CEO armed with a strong record of operating and financial performance on both mature and new aircraft programs with the ability to take Spirit to the next level," Bob Johnson, board chairman of
Spirit has a return on equity of 1.7%, lower than 80% of the companies in the global aerospace and defense industry. Its return on assets of 0.6 also ranks lower than 81% of its industry peers. While earnings and EBITDA per share have been in decline, the company’s revenue has seen healthy revenue growth at a rate of 6.7%, higher than 71% of its industry peers.
Einhorn also added new positions in IAC/InterActiveCorp (IACI), which has gained 13% from his average purchase price, and Capital Bank Financial Corp. (CBF) and National Bank Holdings Corp. (NBHC), which fell 1% and 2%, respectively.