David Einhorn's Greenlight Capital, a value oriented hedge fund, focuses on situations where a stock is seriously undervalued and the margin of safety is high. Einhorn is known to be very disciplined at sticking to what he is good at.
When Greenlight analyzes a stock, it asks 4 key fundamental questions:
- Is it a great business?
- What's the FCF with normalized margins 2 years out?
- Why is it misunderstood?
- What is the opportunity?
With these questions in mind, let's review Greenlight's current holdings:
Marvell: Einhorn has been buying this stock consistently since 2011
Greenlight has been buying Marvell Technology (MRVL) every single quarter since Q3 2011 at an average price of $11. In fact, in the last quarter Einhorn increased this position by 58% from last period.
Marvell designs semiconductors that serve as the brains of cell phones and hard disk drives. The company has a history of leadership in the storage space that Einhorn expects to continue with the transition to SSDs, which has offset some recent headwinds in the HDD market. The Street is pessimistic for two reasons: hard disk drives may eventually be replaced by flash memory (SSD, or "solid state drive"), and Marvell's largest cell phone customer has been Research In Motion (BBRY), a loser in the smartphone market. In Einhorn's view, hard disk drives show no sign of disappearing any time soon, and Marvell position in the SSD storage market is at least as strong as its position in the hard disk drive market.
It is always advisable to invest in a shareholder oriented management team and Einhorn knows this. Marvell continues to aggressively return cash to shareholders as it repurchased roughly 34 million shares in the quarter for $283 million, leaving roughly $617 million remaining under authorization. Of note, over the past 2 years MRVL has returned 182% of $1.3billion in FCF to shareholders through a combination of share repurchases $2.3 billion (180 million shares) and dividends $99 million (2.5% yield at current levels).
Valuation is also compelling. At current levels, MRVL trades at 12.8x CY13 EPS (8.6 x ex-Cash) with FCF yield (CY13) of 7.7%. RBC Capital assumes that sentiment and structural challenges are positioned to alleviate/improve resulting in a potential multiple expansion. RBC thinks that FCF growth is under-appreciated even with the assumption of limited pick-up in Mobile & Wireless.
In the last earnings release, Marvell reported Q4 (January) earnings of $0.19 per share, excluding non-recurring items, which were $0.06 better than the Capital IQ Consensus Estimate of $0.13 while revenues rose 4.4% year/year to $775.3 million vs the $722.21 million consensus. Looking into FY14, Marvell is focused on several growth opportunities including share gains in HDD and SSD controllers, adoption of the company's 2x2 and 4x4 802.11ac connectivity solutions and the ramp of the company's unified communications platform. In other words, Marvell is launching new products that have strong potential.
To sum up, Einhorn hopes the company's latest repurchase program will be aggressive and he used weakness in shares to add to his position. Marvell is releasing interesting products and the last earnings report showed that the Street could have overly pessimistic assumptions. Its current valuation is compelling which could lead to further share appreciation.
Microsoft: Greenlight buys again as the stock approached $26
Greenlight has been investing in Microsoft (MSFT) since the last 5 years and every time the stock went into the $25/26 range, the fund increased its position. Last quarter was no exception as Greenlight increased MSFT position by 41%.
Although there could be a secular move by consumers to non-Windows-based mobile devices such as the iPad, Microsoft is still selling its core products (Win and Office) in a predictable way.
In the last earnings call, Microsoft reported earnings of $0.76 per share, $0.01 better than the Capital IQ Consensus Estimate of $0.75 while revenues rose 2.7% year/year to $21.46 billion vs the $21.5 billion consensus. In addition, gross margin was 73.5% vs. estimates of ~73%. MSFT reported a solid quarter, highlighted by continued adoption of Win8 (>60M sold), Server & Tools and Bing Search monetization. Additionally, Microsoft told investors that enterprise demand remains healthy, as customers continue to add products and additional seats to their enterprise agreements.
Shares are very cheap, trading at just 9x Forward P/E and a Price/FCF of 8x which is at the low end of MSFT P/FCF 5 year range of 8-14x. Microsoft could approach to $30 considering that analysts expect FY13 EPS of $2.85 multiplied a conservative P/E of 10x.