|Back to main|
Billionaire David Einhorn Takes Profits In Marvell Tech
4/14/2013 10:07:00 AM
The title sounds bad right? Einhorn has owned Marvell
Technology (MVRL) since he first started buying up the stock
during the third quarter of 2011. Recent news broke that Einhorn
sold off some 1.27 million shares of Marvell at around $10.16 per
share, worth some $12.9 million. Should investors consider this
sale as the change in his opinion about Marvell? Should we turn
bearish on Marvell now?
Einhorn's love for Marvell is not lost upon me. His hedge fund called Marvell its fourth largest public equity holding at the end of 2012 and made up 5.8% of his 13F portfolio, while Einhorn did admit that Marvell was Greenlight's biggest loser in 2012, falling from $13.85 to $7.26. Even still, Einhorn said this about why, despite its recent troubles, Marvell is still in his portfolio...
Marvell's silicon solutions are primarily used for data storage, communications and consumer markets. Its storage segment accounts for nearly 45% of revenues and includes solutions primarily for the hard disk and solid-state drive markets for leading hard disk drive manufacturers, including Hitachi, Seagate Technology, Toshiba and Western Digital.
One of its key growth initiatives includes making its mobile and wireless segment (26% of revenues) a bigger part of revenues. These include mobile products, such as communication and application processors made largely for handsets and tablets. Major customers include Research in Motion, Motorola and China Mobile.
Its other major segment is networking (22% of revenues) and includes wired and wireless switching solutions that enable data transmission between communications systems, for networking and wireless equipment makers, including Cisco Systems, Dell, Hewlett Packard and Intel.
Marvell outsources a majority of its semiconductor fabrication to third-party foundries, which is why it is a "fabless" company, which is different from companies that have internal manufacturing plants (called "fabs"). Fabless companies have not invested money to to own and maintain a fab, allowing them to focus more on developing and selling products.
I would be remiss if I failed to mention the late 2012 pressure on the stock related to a verdict that will require Marvell to pay out some $1.17 billion to Carnegie Mellon University for patent infringement. This pushed the stock to a low of $7.40, but since then the stock has recovered nicely. What's more is that with this $1.91 billion in cash and short-term investments, Marvell would be able to cover the judgement. Hopefully, there will be positive news from coming from the patent trial with Carnegie Mellon University, which moves to the next level beginning May 1, 2013.
Einhorn has also publicly addressed the judgement, noting that it could and should be reduced...
The highlights for Marvell gets better, as the stock is also trading on the cheap, especially when compared to notable comps.
From a valuation standpoint, Marvell is very intriguing. Its five-year average P/E, relative to the S&P 500 price to earnings ratio (company P/E divided by S&P 500 P/E) is 140%; however, the company is currently trading at only 105%. What's more, on a forward P/E basis (forward P/E of 11.6), Marvell trades at a near 40% discount to the S&P 500.
Assuming Marvell gets the recognition it deserves, and shakes off the Carnegie Mellow overhang, it should trade more in line with historical P/E standards, near 140% the S&P 500. If so, the upside is better than many analysts expect. Using the 2014 (ends January) fiscal year analysts' EPS estimates ($0.78 per share) and applying a 25.75 P/E, then the theoretical trading price is around $20, an upside of nearly 100%.
Einhorn has been steadily upping his stake in Marvell since the third quarter of 2011, and although the stock is down over 33% since the end of third quarter 2011 to date, the company still has growth prospects. For investors willing to wait, the tech company does pay a 2.3% dividend yield that is well covered. The annual dividend payout accounts for less than 25% of free cash flow.
I think Einhorn is in Marvell for the long-haul. When he first started scooping up Marvell shares in third quarter 2011, the company traded around $15 per share, with the current stock price still 33% below those levels. And why listen to Einhorn? Since its inception in 1996, Greenlight has managed to return an annualized 19.4% net of fees.
About GuruFocus: GuruFocus.com tracks the stocks picks and portfolio holdings of the world's best investors. This value investing site offers stock screeners and valuation tools. And publishes daily articles tracking the latest moves of the world's best investors. GuruFocus also provides promising stock ideas in 3 monthly newsletters sent to Premium Members .