Tag Archives: David Einhorn

Observations: Tesla, David Einhorn & Turkey

Tesla / Elon Musk

Elon Musk’s “Tesla is somehow going private” Tweet has triggered a lot of comments and discussions (good coverage on FT Alphaville).

For me the main take-away of this story is two fold:

One the one hand, listed equity markets are not the best place to raise equity capital once you are listed. It is OK to raise equity once when you IPO but after that, a company should only pay dividends and buy back stock. Part of the reason that Tesla is shorted so much is the expectation that they will need to raise equity which clearly shows the dilemma of public equity markets these days. Personally, I do think we will see more “Softbank style” large private vehicles which will specialize in providing capital to growing companies and save them the troubles of public equity markets until the company is mature enough. Unfortunately this will lead to the shift of a large part of value creation away from public markets and out of the reach of many “Normal” investors.

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Greenlight Re (sell), Handelsbanken (buy) & Bill Ackman

Greenlight Re

Following the E.On discussion, I really asked myself if it was such a good idea to invest into Greenlight Re.

My argument was as follows:

  • the stock looks historically cheap
  • Einhorn had a few very bad years
  • based on its track record hw might do much better in the future

After the E.On discussion however, I recognized the follwoing: Whenever I looked at a stock that Einhorn bought (Delta Lloyd, AerCap, SunEdison, Consol, E.on), I never understood why he did it or I thought it was not a good idea. Even if I look at his 20 bigest disclosed positions, I don’t find any stock that I would buy on my own:

     APPLE INC    AAPL  US
GENERAL MOTORS CO    GM  US
ISS A/S    ISS  DC
CHICAGO BRIDGE & IRON CO NV    CBI  US
TIME WARNER INC    TWX  US
MICHAEL KORS HOLDINGS LTD    KORS  US
AERCAP HOLDINGS NV    AER  US
CONSOL ENERGY INC    CNX  US
ARKEMA    AKE  FP
AECOM    ACM  US
ON SEMICONDUCTOR CORP    ON  US
BANK OF NEW YORK MELLON COR    BK  US
TAKE-TWO INTERACTIVE SOFTWR    TTWO  US
GREEN BRICK PARTNERS INC    GRBK  US
MICRON TECHNOLOGY INC    MU  US
MARKET VECTORS GOLD MINERS    GDX  US
VOYA FINANCIAL INC    VOYA  US
LIBERTY GLOBAL PLC-SERIES C    LBTYK  US
DILLARDS INC-CL A    DDS  US
APPLIED MATERIALS INC    AMAT  US

That in effect lead me to the conclusion that I am most likely the wrong kind of shareholder for Greenlight Re. If things go really  bad, I am not sure if I would have enough trust to keep the position or if I would get really nervous because I could not identify with the manager.

Secondly, I honestly don’t have much insight, how Einhorn generated his fantastic past track record.

Together with not liking his long position, I think it was a mistake to invest in Greenlight and I sold my stocks as mentioned in the comments at around 18,45 USD per share with a tiny profit of around +2,5%.

It could well be that Greenlight maybe has a spectacular 2016 but as I have mentioned above, one should not allocate money to someone where you don’t understand what that manager is doing. Conviction is important to withstand all kind of behavioural traps in investing.

Finally, I am not sure if there could be some isues on the Reinsurance side. AIG surpisingly disclosed a pretty massive reserve strengtening for Q4 and it looks like that this is mostly “long tail” exposure from long ago which is also the “bread and butter” business of Greenlight Re.

Handelsbanken

Following the market turmoil, I began to establish a first (2%) position in Handelsbanken. Purchase price was on average ~98 SEK per share. Valuation wise they are now at a level where I would expect to earn around 16-17% p.a. long term which looks atractive to me despite potential short term head winds.

I plan to increase this to a full position over the next months. I funded this position by selling some of the HT1 bonds, as I want to keep some cash (~10%) in order to be flexible if some of my watch list shares become really cheap.

Bill Ackman

Bill Ackman came out with his Q4 letter to investors just a few days ago. His results were similarily bad than Einhorn’s with -20,5% after fees for 2015.

There was already good coverage on his letter for instance from Matt Levine.

My 2 cents on this:

  • compared to Einhorn, he mostly blames others for his losses (index funds, copycats, the market)
  • he doesn’t seem to fully understand how index funds work
  • funnily enough, he accuses index funds that their only goal is to “attract more funds” at low costs. Why did Ackman then create the public vehicle Pershing Square Holdings ? Well, he also wants to attract more fund but a high costs.
  • he thinks that there are not enough activists. Understandable from an activist perspective. Subjectively I have the feeling that Carl Icahn alone is activist at every single stock in the US.
  • at least he admits that “platform” companies like Valeant are not such fantastic cases per se.

On a personal level, I do think there might be already TOO MANY activists. Many of them only care for short term payouts which, in many cases, might not be benefitial for long term share holders.

All in all, if I would have money invested with Ackman, I would really ask myself if I would trust a guy who only blames others for his misfortunes.

 

 

 

 

 

David Einhorn: Nice Q4 letter but E.On as a long pick ? Really ? C’mon !!!

As this has turned out to be a very long post, a quick “Executive Summary”:

David Einhorn has published that German utility E.ON is one of his major new long positions. Based on what I have written in the past about E.On, I do think his summary investment rational has some serious flaws,  mainly:

  • buying management’s “spin” that the recent share price decline was only caused by uncertainties about nuclear provisions
  • assuming a quick and very benefitial (for E.ON) solution for nuclear liabilities

To me it looks like that he tries to come up with some short term, rather risky “bets” in order to make good on his horrible 2015 performance as quickly as possible.

As a new shareholder in Greenlight Re I have to seriously rethink if I want to stay invested, however as a German tax payer I might also be biased in this case.

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Greenlight Re (GLRE): Poor man’s Berkshire or interesting bet on a David Einhorn Comeback ?

Management Summary:

Greenlight Re is an interesting special situation in my opinion combining 2 bets in one stock:

1. It is a bet that David Einhorn will come back after his worst year ever and 4 years of underperformance
2. Greenlight Re, the Reinsurance company whose investments he manages “mean reverts” at least closer to its historical price book ratio.

This “bet” should be relatively uncorrelated to the overall market and due to the construction of the investment mandate, Einhorn can charge only half of the performance fee for some time.

Disclaimer: This is not investment advise. DO YOUR OWN RESEARCH !!!

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Dear David Einhorn: Why are your interns doing all the cost of capital estimates (Consol Energy) ?

Just to be clear: I have nothing personally against David Einhorn. I am just wondering how he comes up with his underlying valuation assumptions these days.

I already had issues with funding cost assumptions at AerCap as well as his return assumptions for SunEdison.

Now I came across his latest pitch for Consol Energy this week. This is the slide which explains the value of the coal business:

Without going into the other details, the question here is of course: How the hell did he come up with a WACC (Weighted Average Cost of Capital) of 8,4% ?

The WACC is supposed to be the blended total cost of capital of a company, including both, debt and equity. For Consol Energy however the obvious problem is the following: Their bonds are trading at a level of 12-15% p.a. Even if we us an after-tax figure of maybe 8-10%, even the after-tax cost of debt is higher than the assumed WACC.

As the cost of equity has to be higher than senior debt (it is more risky), there is no way in ending up with a WACC of 8,4%. Maybe some of my readers can help me out if I am missing here something, but I am pretty sure that 8,4% is not the right number for Consol’s cost of capital. He uses the same WACC later for the shale gas part of the company, so it is certainly not a typo:

On his website he then explains how they (or his intern) came up with the WACC (slide “A-1”):

consol wacc

The real joke however is to be found a little bit below:

consol 2

Edit: Now that I know that it was meant as a joke it reads somehow different 😉

 

So he somehow believes that his WACC is actually conservative.

Let’s look at some “real world” data. This is the overview of Consol’s currently outstanding bonds:

consol bon ex

The average yield based on outstanding amount of Consol’s bonds is 14,5%, a full 11% (or 1.100 basis points) higher than in Einhorn’s calculation. As I have said above, the cost of equity has to be higher than the cost of debt as thee is no protection to the downside. So if we use Einhorn’s quity risk premium of around 6%, we would get cost of equity of around 20,5%.

Based on Einhorn’s weighting, we would get a WACC of (20,5%*0,75) + (15,5%*0,65*0,25)= 17,73%, roughly speaking double the charge that Einhorn uses. You might say this is conservative but in effect it is just realistic and based on current market prices.

Even at issuance, Consol’s cheapest bond had a 5,875% coupon, far above the assumed 3,5%, so it is not even a question of current market dislocation.

Either Einhorn assumes implicitly that cost of capital goes down dramatically or he has some “secret” that I don’t know. If I look at Einhorn’s last pitches, especially AerCap, SunEdison and Consol, there seems to be a common theme: He is always pitching capital-intensive companies with significant debt where he assumes pretty low cost of capital in order to show upside.

So what he seems to do these days is effectively betting on low funding costs which, at least for SunEdison and Consol didn’t work out at all.

In my opinion, this has nothing to do with value investing. Value investing requires to make really conservative assumptions to make sure that the downside is well protected as first priority. For those leveraged, capital-intensive businesses however, the risk that you will get seriously diluted as shareholder in those cases is significant, there is no margin of safety. On the other hand I somehow admire his Chupza. Standing in front of a lot of people who paid significant fees to hear the “Hedge Fund honchos” speak and pitching such a weak case with unrealistic assumptions is brave.

Of course a stock like Consol can always go up significantly after dropping -75% year to date, but the underlying analysis is really flawed. I would actually like to ask him if he really believes in those assumptions or if he just didn’t pay any attention to the details. This would be really interesting.

Maybe a final word on this: I am always criticising David Einhorn on his assumptions. Which is easy because he actually is very transparent about them. Many other Hedge Fund managers just tell nice stories. I am pretty sure that in many cases the assumptions behind those cases are not much better.

SunEdison (SUNE) – Deja vu all over again

SunEdison, a US based renewable energy company popped up 2 times on my radar screen. Once a year ago as one of David Einhorn’s top picks and last week as one of the very few published long investments of John Hempton at Bronte.

I try to sum up Einhorn’s 2014 thesis in four bullet points:

– Solar energy is competetive, strong growth almost guaranteed
– SUNE has a moat and will grow strongly by maintaining its margins
– extra value is created via the “YieldCo” subsidiary
– investors don’t understand the company especially the fact that most of the debt is “non-recourse”

The “Moat”

From Einhorn’s slide deck:

As an experienced project developer, SUNE’s financial, legal, and due diligence expertise gives it a competitive moat. It has opened offices in the most attractive international markets several years before anyone else, giving it a first mover edge and unique geographic diversity in an industry that faces capricious governments, currency fluctuations, sovereign risk and competition.

Well, now it is pretty easy to point out that this thesis might have some flaws after the stock cratered in the last weeks:

Let’ just look at the annual report where SUNE reports on competition:

Competition. The solar power market in general competes with conventional fossil fuels supplied by utilities and other sources of renewable energy such as wind, hydro, biomass, concentrated solar power and emerging distributed generation technologies such as micro-turbines and fuel cells. Furthermore, the market for solar electric power technologies is competitive and continually evolving. We believe our major competitors in the renewable energy services provider market include E.On, Enel, NextEra, NRG, SunPower Corporation, First Solar, Inc., JUWI Solar Gmbh and Solar City. We may also face competition from polysilicon solar wafer and module suppliers, who may develop solar energy system projects internally that compete with our product and service offerings, or who may enter into strategic relationships with or acquire other existing solar power system providers.
We also compete to obtain limited government funding, subsidies or credits. In the large-scale on-grid solar power systems market, we face direct competition from a number of companies, including some utilities and construction companies that have expanded into the renewable sector. In addition, we will occasionally compete with distributed generation equipment suppliers.
We generally compete on the basis of the price of electricity we can offer to our customers; our experience in installing high quality solar energy systems that are generally free from system interruption and that preserve the integrity of our customers’ properties; our continuing long-term solar services (operations and maintenance services) and the scope of our system monitoring and control services; quality and reliability; and our ability to serve customers in multiple jurisdictions.

If you compete mainly on price, then there is obviously not much of a moat. There are no network effects, they don’t have any patents and clients don’t care about the brand of a solar project company. In contrast, a strongly growing markets attracts many new entrants which will drive down margins especially if it is relatively easy to enter the market. or even if there would be an “econimies of scale advantage”, in a strongly growing market this is not worth much

Germany is here maybe already some years further in the experience curve and one learning here was that there wasn’t any first mover advantage. In contrast, many of the first movers made some real mistakes like contracting solar modules for fixed prices and were then wiped off by the followers who bought cheaper.

Success metrics

If you look at SunEdisons investor presentation, you don’t see any GAAP numbers, only adjusted EBITDAs and self created metrics like MW and GW delivered etc. The reason is clear: GAAP numbers look awfull, both earnings and cashflows at all levels. The company is using boatloads of money under GAAP reporting.

Overall, the accounts are pretty much incomprehensible not only on the financing side but also cash flow wise. So non-recourse debt sounds great but without earnings it will be a quite difficult investment case.

The YieldCo – TerraForm Power

TerraForm Power is a consolidated subsidiary of SUNE but has a stock listing and minority shareholders. The sole function of TerraFrom power is to buy the projects from SUNE, leverage them up ~4:1 or 5:1, hold them and pay out dividends. The stock price got hit hard along SUNE as this chart shows:

However according to Einhorn the participation is extremely valuable due to 2 reasons:

1. A Yieldco structure is value enhancing per se as Yieldco investor require much lower returns on investment as stock investors
2. Terraform and SUNE have a structure in place where SUNE retains much of the upside of the YieldCo, so the worth to SUNE is much higher than the market value of the shares

Einhorn makes some remarkable comments in his presentation, but I was struck mostly by this one:

In the recent sell‐off, Terraform’s shares declined with the oil and gas MLPs. Because most MLPs pay out cash flows from depleting oil and gas reserves that need to be replaced with new wells, these companies need continued access to cheap capital just to sustain their dividends. Terraform doesn’t face that risk because solar assets don’t deplete. So Terraform will only raise capital for growth.

Well, this is clearly wrong. Of course do Solar panels deplete. They seem to deplete clearly slower than oilwells but the problem is that there are not that many old solar panel installed to actually get statistical relevant numbers. Some studies show that there is a relatively high loss of power in the beginning (~5%) and then a depletion of capacity of around 1% per year. Additionally, most of the funding and the electricity take-off agreements have to be renewed at some point in time which includes some significant “roll over” risk ithin the YieldCos.

Another thing that struck me is the fact that both, SUNE and Einhorn assume ~8,5% p.a. unlevered return on their renewable assets going forward which then can be levered up nicely even if you have to pay 6% interest on your bonds. I don’t really know the US market, but assuming such a yield in Europe would be completely unrealistic. Unlevered yields for renewable energy projects are at 4-6% p.a. max and you can only lever them up with “low cost” leverage for instance pension or insurance liabilities, it doesn’t really work with long term more expensive “subordinated” capital as many companies have found out the hard way.

Maybe the US market is less competitive to allow such returns ? I find that hard to believe. Just by chance I have been involved in some uS wind projects and the returns are nowhere near 8% unlevered but rather similar to European yields.

Another thing which is different to European projects: In Europe, you don’t have specific credit risk in the projects as the electricity has to be taken off from the grid, which means that basically all grid user guarantee your return. SunEdison’sproject contain undisclosed credit risks because if the client default there will be no backstop.

That leads to the question: Who on earth is actually buying into those YieldCos ? In TerraForm’s case any upside is capped and equity holders are fully exposed to any problems that could show up like increasing interest rates, defaults of off-takers, debt roll risk etc. So who is prepared to take equity like risk but accepting bond like returns ? I do know but my guess is that many yield starved private investors will most likely not care about the risks as long as they get a “juicy” dividend. In Germany something similar but on a lower scale happened. a lot of the renewable companies financed themselves with “participation rights” and promises of high dividends but most big cases ended in spectacular failures. I covered some here for instance

To shorten this: Yes, at the moment the Yieldco structure could actually generate some value because for the time being there seem to be enough stupid investors out there who buy something with equity risk in exchange for bond like returns. But this could go away quickly especially if some of them blow up spectacularily. It’s the same old reason why people on Wallstreet earn so much: Pretending that repackaging an asset increases its value.

Financing structure

Although the complicated financing structure attracted me to the stock in the first place, based on what I have written above I don’t think it’s worth the time to dig deeper. One thing that John Hemption seems to have missed in his post is the fact SUNE has implemented a margin loan with TerraForm Power shares as collateral. Such a strcuture alone for me already indicats that either those guys don’t know what the are doing or that they are really desperate.

In such a case the only “safe place” in the capital structure is within the senior secured paper, everything else in my opinion is more a gamble than a value investment.

Summary:

At the first glance Sun Edison looks interesting. You can buy into a (still) strongly growing company at around 1/3 of the price David Einhorn paid a year ago. From my point of view however the business relies on two fundamental assumptions to perform as planned:

– the ability to continously source renewable energy projects with really high yields (“risk free” plus 6% or so)
– enough stupid investors who buy into YieldCos with equity like risks and bond like returns to subsidize the development company

If Germany as one of the renewable power pioneer markets is any indication, both assumptions will not hold for very long. In Germany’s case, the yield for the projects went down very quickly especially after government subsidies were reduced and the “yield investors” got fleeced massively as a consequence.

Clearly, in the short run SUNE and TERP could make massive jumps up and down in price but mid- to long term I don’t think that they will be great investments.

P.S.: It might look like I want to bash David Einhorn, as this is already the third time that I strongly disaggree with him after Delta Lloyd and Aercap. But on the contrary, i do still think that he s one of the best investors in the hedge fund area, he just had some bad luck and a lot of money to manage which makes things difficult.

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