Should Investors Invest in These Einhorn's New Buys?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

David Einhorn, one of the most successful hedge fund managers ever, has managed to generate an annualized return of 21.5% since its inception in 1996. Recently, he has initiated three new buys in the fourth quarter of 2012 in Google (NASDAQ: GOOG), Vodafone (NASDAQ: VOD) and Western Digital Corp (NASDAQ: WDC). Let’s quickly look at all three stocks to see whether or not we should follow David Einhorn into these businesses. 

A Global Leader in Search Engine Business

In the fourth quarter of 2012, Einhorn bought 63,000 shares of Google at an average price of nearly $700 per share, with a total transaction value of $44.1 million. At the time of writing, Google is trading a bit higher at nearly $793 per share, with a total market cap of $261.4 billion. Google is considered the global leading search engine company; as of January 2013, Google owns 67% of the total global search market. Meanwhile, Microsoft ranked second with a 16.5% market share. Google has a quite conservative capital structure, with huge amount of cash on hand and little debt. As of December 2012, it had $71.7 billion in total stockholders’ equity, more than $48 billion in cash, and only $5.5 billion in both short and long-term debt. With the enterprise value of $220.5 billion, Google is valued at around 13.55x EV/EBITDA.

A Mispriced Mobile Communication Company

Einhorn’s second new buy in the fourth quarter of 2012 was Vodafone, one of the largest mobile communication corporations in the world. Einhorn purchased 1.6 million shares of Vodafone at an average price of around $26.60 per share. What Einhorn liked about Vodafone was its 45% stake in Verizon Wireless. He said that the market seems to totally ignore the value of Vodafone’s stake in Verizon Wireless. Verizon Wireless has been generating increasing free cash flow, and it could have used those cash flows to pay dividends to Vodafone. However, Verizon Communications, a 55% owner, has restricted Verizon Wireless from doing so for years. As Verizon Wireless generated around $27 billion in adjusted EBITDA, the 45% stake would represent around $12.1 billion in adjusted EBITDA. If Verizon Wireless is valued at around 10x EV multiples on the market, a 45% stake would be worth more than $120 billion in enterprise value. Vodafone is trading at nearly $26 per share, with a total market cap of $127.7 billion. The market is valuing Vodafone at only 7.93x EV/EBITDA. In addition, the company is paying around a 3.9% dividend yield.

A Top Global HDD Maker

Western Digital was the last new buy of David Einhorn in the fourth quarter 2012. He bought around 600,000 shares at an average price of $36.50 per share, with a total transaction value of around $22 million. He also owned shares of Western Digital’s main competitor, Seagate Technology (NASDAQ: STX). As of December 2012, he held more than 8.37 million shares in Seagate Technology, accounting for around 4% of his total portfolio. Both companies are in the race to become the leader in the HDD global market. While Western spent around $4 billion to buy the HDD business from Hitachi, Seagate acquired Samsung’s HDD business for around $1.4 billion. Both Western Digital and Seagate Technology dominate the HDD global market, with a combined market share of around 80%-85%. Western Digital is trading around $48.60 per share, with a total market cap of $11.7 billion. The market is valuing Western Digital at only 2.64x EV/EBITDA. Seagate, with a total market cap of $12.36 billion, is valued as a bit more expensive, at 3x EV/EBITDA. Western Digital is paying a 2.1% dividend yield to shareholders, whereas the dividend yield of Seagate is around 4.4%.

Foolish Bottom Line

Google, Vodafone and Western Digital are the strongest players in their fields. Google is the market leader in the search engine industry, Vodafone is one of the strongest global mobile communications companies, and Western Digital is one of the world’s two biggest HDD makers. With reasonable valuations, investors might consider those three companies for their long-term portfolios.

 

 

 

 


hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Google and Vodafone. The Motley Fool owns shares of Google and Western Digital.. 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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