In the first quarter of 2013, David Einhorn, the founder and president of Greenlight Capital Re, Ltd. (NASDAQ:GLRE), delivered a 6.1% gain. In previous articles, I have talked about four of his new buys including two companies in the oil and gas industries and two companies in the financial industry. In addition, he also initiated long positions in two other businesses, Spirit AeroSystems Holdings, Inc. (NYSE:SPR) and IAC/InterActiveCorp (NASDAQ:IACI) . They are small positions though, as Spirit AeroSystems and IAC accounted for only 0.48% and 0.3%, respectively, of his total portfolio.
The aircraft parts maker and customer concentration
Spirit AeroSystems Holdings, Inc. (NYSE:SPR) is considered to be the biggest non-original equipment manufacturer of aircraft parts and commercial aerostructures globally, operating in three main business segments: Fuselage Systems, Propulsion Systems and Wing Systems.
Most of its revenue, $2.59 billion, or 48% of the total 2012 revenue, was generated from the Fuselage Systems segment while the Propulsion Systems and Wing Systems segment contributed around $1.42 billion and $1.37 billion, respectively, in revenue in 2012. However, Wing Systems generated a loss of nearly $340 million in 2012, mainly due to the forward loss charge of $151 million on its Rolls-Royce program and another $8 million on its B767 program.
Spirit AeroSystems Holdings, Inc. (NYSE:SPR)’ two biggest customers are The Boeing Company (NYSE:BA) and Airbus Americas, Inc., which also have long-term supply agreements with the company. In 2012, The Boeing Company (NYSE:BA) represented around 84% of the total revenue while Airbus Americas, Inc. accounted for around 9% of its total sales in 2012.
Its net income has experienced a significant drop of 82% to $35 million in 2012, mainly due to the $146.2 million impact from severe weather event in Kansas facility in the April 2012. However, the free cash flow came out positive, at $295 million. Spirit AeroSystems Holdings, Inc. (NYSE:SPR) is trading at $21.60 per share, with the total market cap of $3.1 billion. The market values the company quite expensively at 25.70 times EV/EBITDA.
The EV/EBITDA ratio stands for Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization, in which Enterprise Value = Market Capitalization + Debt – Cash. While the price-to-earnings ratio only reflects the relationship between the market price and its earnings, this valuation ratio takes into account the company’s market value, debt, cash and its cash flow position. The lower the ratio, the cheaper the stock.
However, the company seems cheap with only 0.79 times PEG. PEG is the price-to-earnings-to-growth ratio, taking the annual earnings growth into account. The company is considered overvalued if the PEG is greater than 1 and undervalued if PEG is less than 1.
The media and Internet company with consistent cash-generating ability
IAC/InterActiveCorp (NASDAQ:IACI), is the owner of several websites including Ask.com, HomeAdvisor.com and About.com. The majority of its revenue, $1.46 billion, or 52% of the total revenue, was generated from the Search & Applications segment. The Match segment ranked second with $713.5 million in revenue. Those two segments were also the two largest profit contributors, with $305.6 million and $205.5 million, respectively, in operating profits.
IAC/InterActiveCorp (NASDAQ:IACI) has not only been growing quite consistently for the past five years. It is also the cash cow. For the past five years, its operating cash flow has fluctuated in the range of $328 million to $374 million while the free cash flow stayed in the range of $290 million to $332 million. IAC/InterActiveCorp (NASDAQ:IACI) is trading at around $51 per share, with the total market cap of $4.3 billion. The market does not value IAC/InterActiveCorp (NASDAQ:IACI) cheaply, at 9.3 times EV/EBITDA.
Compared to its famous peer, AOL, Inc. (NYSE:AOL), IAC has a much higher enterprise-value multiple. AOL, at $37 per share, is worth around $2.8 billion on the market. The market values AOL, Inc. (NYSE:AOL) at only 5.5 times EV/EBITDA. However, if the potential growth is taken into consideration, AOL, Inc. (NYSE:AOL) seems to be more expensive with a higher PEG ratio at 1.67 while IAC is valued at only 0.41 PEG.
Recently, the company’s premium video platform, AOL, Inc. (NYSE:AOL) On Network just released a new global branded video content offering, which is called: Be On. Be On let marketers get access to the company’s two HD studios to develop premium videos and get them syndicated in the AOL, Inc. (NYSE:AOL) On Network, which had more than 724 million video views each month.
AOL, Inc. (NYSE:AOL) only pays shareholders a special dividend of $5.15 per share at the end of 2012, and now it has stopped paying any dividends. In contrast, IAC offers investors the dividend yield at 1.9%. Interestingly, the payout ratio is not quite high, at a reasonable rate at 43%.
My Foolish take
Einhorn might like IAC/InterActiveCorp (NASDAQ:IACI) because of its consistent cash flow generating capabilities and Spirit AeroSystems Holdings, Inc. (NYSE:SPR) due to its leading position in quite an interesting niche aerospace market. If potential growth was factored in, both companies seem cheap, with their PEG ratios are less than 1. Looking forward, I think both companies could deliver decent returns for long-term shareholders.
The article Two of David Einhorn’s Newest Buys originally appeared on Fool.com is written by Anh HOANG.
Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Spirit AeroSystems Holdings. Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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