David Einhorn Sells Best Buy & Dell, Buys Cigna & Coventry Health: Q2 Letter ~ market folly

Tuesday, July 24, 2012

David Einhorn Sells Best Buy & Dell, Buys Cigna & Coventry Health: Q2 Letter

David Einhorn's Greenlight Capital is out with their Q2 2012 investor letter and Dealbreaker has it posted.  In it, they reveal that they no longer own Best Buy (BBY) or Dell (DELL).  Additionally, they started new stakes in Cigna (CI) and Coventry Health Care (CVH), playing the managed care sector.  Here are some excerpts from the letter:

On Best Buy:  "We thought that the core debate was whether or  not the company could compete with Amazon.  The answer at this point is that maybe it can and maybe it can’t.  (Despite the consensus view, our store surveys have repeatedly shown  that there is no price benefit for consumers to browse at BBY and then purchase at Amazon.)   There has been some deterioration in BBY’s domestic performance, which we attribute to a  lack of a “must have” consumer electronics  product, rather than  an erosion of BBY’s  competitive position.  While we held the shares, three unexpected problems emerged:  First,  BBY depleted $1.3 billion of its cash resources by paying a double-digit multiple for  Carphone Warehouse’s share of the Best Buy Mobile profit stream.  The market promptly revalued those earnings to BBY’s mid-single digit multiple.  Second, in the most recent quarter,  BBY’s international profits collapsed.  In particular, comparable sales in its Chinese business  fell 28% as the Chinese economy appears to have hit a wall.  Finally, the company dismissed  its CEO over his personal conduct, and also removed the Chairman for failing to respond  properly to the CEO’s misbehavior.  As a result, the company has an interim CEO and is  trying to come up with a strategy.  We worried  that this could lead to additional business  disruption so we exited with a loss."

On Dell:  "We had thought that the growth in the non-PC business would be enough to
offset the deterioration in the PC business.  The non-PC growth was smaller than we’d hoped
and the PC deterioration was worse than we’d anticipated.  While DELL has a good balance
sheet, it appears likely that management will try to use much of the cash to try to buy its way
into better businesses.  At a minimum, this will erode some of the value cushion that the cash
balance creates."

On Cigna:  "CI is a managed care company with three primary divisions:  Cigna HealthCare, Cigna Group  Disability and Life, and Cigna International.  Cigna HealthCare, which comprises about 70%  of CI’s profits, offers medium and large companies traditional risk-based insurance, in  addition to administering plans for those that prefer to self-insure.  Cigna HealthCare recently  bought HealthSpring to enter the fast-growing Medicare Advantage market.  Cigna Group  Disability and Life is a low-growth, stable  business. Cigna International, which provides  insurance policies for individuals, as well as insurance and administrative services for multinational companies and governments, is growing at more than 20% per year.  We believe that  CI deserves a higher multiple because the plan administration business is a service business  that doesn’t take risk, and the other divisions do not warrant discounted values.  Our purchase  price of $45.42 per share valued CI at less than 8x estimated 2012 EPS and approximately 6x  our forecast of post Obamacare 2014 EPS.  CI shares closed the quarter at $44.00 each."  Note: CI has since fallen further and you can currently buy it at cheaper prices than Greenlight.

On Coventry:  "CVH is a regional managed care company with operations in the mid-Atlantic, Midwest and  parts of the South.  The company offers commercial risk-based insurance and has an  expanding business in the government-sponsored Medicaid and Medicare programs.   Problems with a recently-acquired three-year contract to provide managed care services to the  Medicaid population in Kentucky caused the company to  significantly reduce earnings  guidance for 2012.  This led to a large drop in the stock price.  We believe the issues related  to the Kentucky contract are manageable and finite, and CVH will return to breakeven or a  profit on this contract in 2013 from a loss this year.  Our average purchase price of $31.22  represents 8x our forecast  for 2014 earnings net of $6 per share of cash and reflects our  estimate of the negative impact of Obamacare.  CVH closed the quarter at $31.79 per share."

We've also recently highlighted some of Einhorn's thoughts on Apple, Green Mountain and Amazon.

Einhorn's top five largest long positions at the end of the quarter (in alphabetical position) were: Apple (AAPL), General Motors (GM), gold, Marvell Technology (MRVL), and Seagate Technology (STX).  We highlighted how Greenlight was adding to their STX position last month.

Instead of waiting for a copy of the letter, we'll send you over to Dealbreaker who already has it posted here.

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