By Matt Doiron
In his second quarter letter to investors, Greenlight Capital manager David Einhorn noted that the fund's investment in Marvell Technology (MRVL) was one of the fund's largest losing positions for the quarter- it is now down about 28% since the beginning of April- and stated that he was adding shares (read Greenlight Capital's quarterly letter). The most recent available data, from the end of the first quarter of 2012, had been that Greenlight owned 18.4 million shares of the stock- little change from the 16.6 million shares that he had first reported in September 2011 after initiating his position that summer. Now, a 13G filed with the SEC gives Greenlight's total shares as 29.6 million; Einhorn has increased his stake by about 60% in four months, and now owns over 5% of the $6.4 billion market cap company's shares outstanding.
Now that Einhorn has increased his stake, he has passed Maverick Capital, managed by Lee Ainslie, as the top hedge fund holder of Marvell. Ainslie had a position of 20 million shares of the stock at the end of March, just ahead of Greenlight, after adding to its previous holdings in the fourth quarter of 2011 (find other stock picks from Maverick Capital). Dan Loeb's Third Point initiated a position of 10 million shares and D.E. Shaw increased the number of shares in its portfolio by 50% to 83 million. It therefore seems that the stock is quite popular among top investors, not just with Einhorn. Considering the track record these managers have, an investor should look further at the stock.
Marvell is a technology hardware company providing a number of products including processors, communication products, and data storage. In the company's most recent quarterly report, it announced flat revenue compared to the same period a year ago and earnings per share that fell from 22 cents to 16 cents, a decrease of 25-30%. The business had to deal with higher expenses related to cost of goods sold despite little change in revenue; Marvell claimed that this was due to a shift in product mix toward lower-margin lines. Insider activity in the stock is low, but the company has begun using its excess cash to buy back shares (a point that Einhorn noted in his letter). Share buybacks generally occur when management wants to signal to investors that they believe the stock is undervalued. The company also pays a 2.3% dividend yield, returning cash to investors through that channel as well.
Stock declines have left Marvell with a trailing price-to-earnings ratio of 12 and a forward P/E of 8. In this sense- especially taking the existence of dividends into account- it seems to qualify as a value stock. While the company has struggled recently, sell-side analysts project enough growth to give the stock a five-year PEG ratio of 0.6. These values compare well with Marvell's peers. The giant in the technology hardware space, Texas Instruments (TXN), pays a roughly equal dividend yield and P/E ratios of 20 and 13 on a trailing and forward basis, respectively- and TXN's last quarter saw a 34% decline in earnings compared to the same period in the previous year. LSI (LSI) trades at similar valuation multiples to Marvell and is seeing high growth; the stock rose 16% on Thursday after beating on earnings on Wednesday and being upgraded. STMicroelectronics (STM) is unprofitable on a trailing basis, but on a forward basis is given earnings estimates which equate to a P/E of 11. So far this year, STM and Marvell are down close to 20% while Texas Instruments is down closer to 8%; LSI, thanks to its pop today, is now up close to 20% for 2012. We see Marvell as fairly priced relative to comparable companies, and it has an impressive roster of investors with Einhorn in particular being so confident in his views on the stock that he has doubled down on it. It might be wise to follow the hedge funds here.