In the recent Sohn Conference, David Einhorn showed his bullish attitude towards oil & gas solutions provider Oil States International, Inc. (NYSE:OIS). David Einhorn stated that he accumulated shares in this company in the first quarter of 2013 at an average price of $77.16 per share. He believes that Oil States International, Inc. (NYSE:OIS) is cheap at its current trading price. Let’s take a closer look at the company and another of his investments.
Oil States should be worth $155 per share
Oil States’ share price has been sluggish over the past two and half years. From the beginning of 2011 to the middle of 2013, Oil States’ share price has fluctuated in the range of $50.90 per share to $85 per share. Oil States operates in four main business segments: Well Site Services, Offshore Products, Tubular Services, and Accommodations. According to Einhorn, Oil States is undervalued compared to the sum-of-its-parts. Right after Einhorn’s presentation, Oil States rallied more than 4% in one day to more than $99 per share, and it reached nearly $101 per share at the time of writing. At $101 per share, Oil States is valued at only 7.35 times EV/EBITDA.
Einhorn believes that the company should be valued at 8.6 times its 2013 EBITDA, or $120 per share. Interestingly, Einhorn believed that by converting the Accommodations segment into a REIT, Oil States’ share price should be around $155.
Interestingly, it was the same suggestion that JANA Partners wrote in its recent 13D filing when it reported a 9.1% stake in Oil States. JANA mentioned that in order to unlock the hidden value in the company, Oil States should separate the “Well Site Services segment from the Accommodations segment and the formation of a REIT for Accommodations.”
Simon Property Group, Inc (NYSE:SPG) is quite expensively valued
The Accommodations segment had around 64 million square feet of real estate, which is equivalent to 26.4% of the total real estate size of the largest mall REIT in the world, Simon Property Group, Inc (NYSE:SPG). Oil States International, Inc. (NYSE:OIS)is currently operating around 325 retail real estate properties, with a total size of about 242 million square feet. Oil States International, Inc. (NYSE:OIS) is trading at around $179 per share with a total market cap of nearly $55.6 billion.
In 2012, Oil States International, Inc. (NYSE:OIS) generated around $2.22 billion in operating income. Thus, the market values Simon Property Group, Inc (NYSE:SPG) at 25 times its 2012 operating income and as high as 51 times its trailing earnings. It seems that the market values Simon Property Group, Inc (NYSE:SPG) at quite a high valuation. Simon Property Group, Inc (NYSE:SPG)’s payout ratio is as high as 124%, but the dividend yield does not seem to be attractive at only 2.60%.
Oil States derived more than $364 million from the Accommodations segment. If an extremely conservative earnings multiple of only 10 were put on the Accommodations segment, that segment would be worth $3.64 billion, or more than 65% of the total market value of Oil States at its current trading price.
Vodafone Group Plc (ADR) (NASDAQ:VOD)’s valuable stake in Verizon Wireless
In the first quarter 2013, David Einhorn’s long position in Vodafone Group Plc (ADR) (NASDAQ:VOD) was really a winner. Since the middle of February, Vodafone Group Plc (ADR) (NASDAQ:VOD) has moved up significantly, from $25 per share to more than $30 per share. Previously, Einhorn discussed that the market had undervalued Vodafone Group Plc (ADR) (NASDAQ:VOD)’s share price because its valuable 45% stake in Verizon Communications Inc. (NYSE:VZ) was not popularly recognized.
Vodafone Group Plc (ADR) (NASDAQ:VOD)’s share price shot up when Verizon Communications Inc. (NYSE:VZ) stepped up and showed its interest in acquiring the remaining 45% stake of Verizon Communications Inc. (NYSE:VZ) from Vodafone Group Plc (ADR) (NASDAQ:VOD)that it didn’t own. With more than 98 million retail connections, Verizon Wireless is the biggest wireless service provider in the U.S. In 2012, Verizon Wireless generated nearly $30 billion in EBITDA, thus, a 45% stake would be equivalent to nearly $13.4 billion in EBITDA. If an EV multiple of 9 was applied to Verizon Wireless’ valuation, Vodafone Group Plc (ADR) (NASDAQ:VOD)’s 45% stake would be valued at more than $120 billion.
At first, Verizon Communications thought of a $100 billion price tag. However, according to Reuters, some of Verizon Communications’ shareholders agreed on Verizon Communications offer of up to $130 billion for Vodafone’s 45% stake in Verizon Wireless. Craig Leopold, a portfolio manager at Columbia Management Investment advisors commented: “No way do I dream that $100 billion is going to get this deal done. It’s just not going to happen.”
Vodafone is trading at around $30 per share with a total market cap of around $148 billion. Thus, at $120 billion valuation, its 45% stake in Verizon Wireless accounted for more than 81% of its total market cap. David Einhorn wrote in his letter: “We believe that a premium sale followed by a successful return and/or redeployment of the proceeds could unlock substantial value latent in VOD stock. VOD without Verizon Wireless might also become a good acquisition target for AT&T.”
My Foolish take
Personally, I think both Vodafone and Oil States should be considered opportunistic stocks on corporate changes for shareholders. The sale of Verizon Wireless and the REIT conversion for the Accommodations segment for Oil States would potentially unlock the hidden value of Vodafone and Oil States, respectively. However, investors need to be quite patient as the timing is quite uncertain.
The article Einhorn’s 2 Opportunistic Investment Ideas originally appeared on Fool.com and is written by Anh HOANG.
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