Stocks That David Einhorn is Bullish About (Part II)

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David Einhorn’s Greenlight Capital ended the 2012 calendar year with a 7.9% net return, much lower than S&P 500's total return of 16%. In the previous article, I wrote about three stocks which David Einhorn is bullish about, including Apple, Marvell Technology, and Cigna. In this article, I will cover two more stocks that Einhorn thinks have significant rallies ahead. They are Vodafone (NASDAQ: VOD) and Computer Sciences (NYSE: CSC).

Hidden Non-Controlling Interest Value

Vodafone is one of the largest mobile communication companies in the world, operating in more than 30 countries with more than 224,000 base station sites. Over the past year, Vodafone has been fluctuating in the range of $25 - $30 per share. David Einhorn argued that at the current valuation, it seemed that the market ignored Vodafone’s 45% stake in Verizon Wireless. Verizon Wireless generated £40 billion ($63.32 billion) in service revenue and nearly £17 billion ($26.91 billion) in adjusted EBITDA. A 45% ownership represented £18 billion ($28.49 billion) in revenue and £7.69 billion ($12.17 billion) in adjusted EBITDA for Vodafone. Including interest and taxes, Vodafone’s share of Verizon Wireless' results was nearly £4.87 billion ($7.71 billion). 

David Einhorn told shareholders the history and the relationship between Verizon Communications (NYSE: VZ) and Verizon Wireless. Verizon Wireless owed Verizon’s landline business, which was quite profitable at that time, worth billions of dollars. Verizon Wireless has gradually paid back the debt with its increasing free cash flow. Einhorn commented that Vodafone had to suffer from the fact that Verizon has restricted Verizon Wireless to pay dividends for years. He also thought that Verizon’s 55% stake in Verizon Wireless might be worth more than all of its current market capitalization of $122 billion. Sanford Bernstein analyst Robin Bienenstock said that if Verizon Wireless was valued at 9x EBITDA, Vodafone’s stake in Verizon Wireless was worth around $107 billion. Unlike Verizon, Vodafone was not dependent on Verizon Wireless contributions. However, Vodafone was trading at a comparable level with other European peers, at 12x cash earnings, and paying a 7% dividend. As Vodafone’s total market cap is $128 billion, after deducting the value of the Verizon Wireless stake, Vodafone alone is worth only $21 billion on the market.

A Turnaround IT Company

Computer Sciences is one of the global leading information technology and professional service providers, with three board service sectors: North American Public Sector, Managed Services Sector, and Business Solutions and Services. In fiscal 2012, North America Public Sector accounted for 36% of the total revenue, whereas Managed Services Sector and Business Solutions and Services represented around 42% and 23% of the total revenue, respectively. In 2011, the stock price dropped from $55.76 in February to only $22.93 in November, due to the decrease in profits and the contract issue with the UK National Health Service. David Einhorn began to purchase shares in February 2012 after a management change. He estimated the average purchasing price was around $27.78 per share. Currently, Computer Sciences is trading at around $42 per share, delivering Einhorn a sweet gain of 53%. 

He wrote in the letter to shareholders: “We view CSC as a fundamentally sound business that has had margins well below that of its peers as a result of organizational inefficiencies, historical mismanagement, and various non-recurring charges that obscured underlying earnings. In addition, the company owned several valuable assets, including its high-margin Equifax credit services affiliate that we believed could be monetized at an attractive multiple.” The earnings power was estimated to be more than $4 per share. Although the share price has advanced significantly in 2012, Einhorn still believed that there were huge opportunities for “margin improvement, free cash flow conversion and capital deployment.” At the current price, Computer Sciences is valued at only 5.13x EV/EBITDA.

My Foolish Take

Indeed, Vodafone and Computer Sciences seem to be cheap at their current prices. They both could fit in the long-term portfolios of patient investors. Personally, I like Vodafone a lot because if the value of its stake in Verizon Wireless is recognized, Vodafone would be worth double the current valuation.

hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Vodafone. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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