Einhorn invests in NCR...I don't get it
I always keep close tabs on the investments that popular hedge fund managers make in their funds, particularly ones that are made by people like Whitney Tilson, Bill Ackman, and David Einhorn who frequently make detailed presentations on their stock ideas in the media, in their letters to investors, or at conferences.
I currently stock in several companies that David Einhorn owns as well. The companies that we both own include Vodafone (VOD), Pfizer (PFE), and Ensco (ESV). One of these I purchased before I even knew that Einhorn had and the other two are favorites of many value managers, not just Greenlight Capital. I always thoroughly vet companies on my own and never just blindly purchase stocks "because so and so did."
This sort of independent thinking saved me some pain when Einhorn purchased a stake in Boston Scientific (BSX) several quarters ago. The company has brought investors nothing but pain. When I noticed that Greenlight Capital had purchased a stake in the company I thought to myself...Why? Not only is Boston Scientific one of the worst run companies out there, but one of its main products, stents, has actually been scientifically proven to be no less effective at preventing clogged arteries than drugs are. Needless to say I passed on the investment. I have to give Einhorn kudos for quickly realizing his mistake, that the thesis behind his purchase was wrong, and cutting BSX loose with minimal losses.
In his most recent letter to investors, which I referenced yesterday, Einhorn talks about another company that he initiated a position in last quarter, NCR Corp (NCR). Today NCR, renamed to which was originally named National Cash Register, produces a wide variety of kiosks, ATMs, bar code scanners, etc...
When I heard that Einhorn had initiated a position in NCR several weeks ago, I looked into the company and I couldn't figure out his reason for doing so. He has since elaborated on his decision to purchase shares of NCR in this quarter's letter to investors saying the following:
NCR Corporation Manufacturers and services automated teller machines (ATM), retail point-of-sale and self-checkout terminals. The stock has recently been negatively impacted because of large accounting losses on its pension obligations and losses from investments in a new entertainment related business. These items obscure what we believe to be largely sound, strong free cash-flow ATM and retail businesses, poised for solid growth in the coming years from product upgrade cycles. The company's net cash balance sheet and strong ability to generate additional cash-flow give it the flexibility to deal with its pension obligations. In addition, the entertainment business is expected to be breakeven in 2011 and profitable thereafter. The Partnerships established a position in NCR at an average price of $13.58 per share or under 10x current operating earnings excluding the start-up entertainment related losses and adjusting for the true economics of the pension obligation. NCR shares ended the quarter at $12.12 each.
I don't get it. I believe that the "entertainment related business" that Greenlight referenced in its letter is the Blockbuster Express Kiosks that NCR is building. Essentially, these are Redbox-like DVD rental vending machines. I think that it's a stretch that this business will be profitable for NCR in 2012. First of all, it has to compete with Redbox, which dominates the sector. Second, DVD rentals are going away. All movies will eventually be downloaded via computers, set-top boxes, etc. At the very least, Netflix should continue to add subscribers and cut into DVD kiosk revenue. Lastly, I personally wouldn't want to be associated with the Blockbuster name at this point. One could argue that it has negative brand equity right now.
As far as the company's pension woes go, I believe that NCR's pension plans are underfunded by almost one billion dollars. It seems somewhat strange to me for an investor to ignore such a large pension deficit or a significant investment by a company in a new business that could prove to be obsolete in a couple of years.
Is anyone out there familiar with NCR? Am I missing something here?