Is David Einhorn's secret 'fiscal cliff' bet blowing up?

The hedge fund manager hasn't said a word about Martin Marietta, even though he's been vocal on many other investments.

By TheStreet Staff Feb 11, 2013 1:56PM

Construction copyright Photodisc Green, Getty ImagesBy Antoine Gara thestreet logo


Hedge fund manager David Einhorn has grabbed headlines for suing tech darling Apple (AAPL), getting burned on coffee maker Green Mountain Coffee Roasters (GMCR) after a public feud and betting the wrong way on high-flying chipmaker Marvell Technologies (MRVL).


But it's what Einhorn isn't saying that may be most relevant to his investors in 2013.


For instance, Einhorn has kept a long-held short trade in ratings agency Moody's (MCO) on the down low in recent days, despite renewed scrutiny of its AAA ratings ascribed to risky debts prior to the crisis and his confirmation of the bearish bet in October (see TheStreet).


Meanwhile, after referring to a short trade against asphalt and concrete producer Martin Marietta (MLM) at an investor conference in May, Einhorn's been silent on the company's near 40% gain since he first unveiled the trade.


In fact, at that conference -- called Ira Sohn -- Einhorn surprised investors by disclosing a short trade against Martin Marietta instead of a rumored bet against supplements seller Herbalife (HLF), which Einhorn confirmed last week he has no position in.


The Ira Sohn conference was also where Einhorn first referred to the prospect of a $4-to-$6 a share preferred dividend paid by Apple, which he continues to demand, according to TheStreet.


But what about Martin Marietta?


Despite comments from Einhorn in May that the company's earnings would fall off a "fiscal cliff" as government stimulus spending on road construction faded and budget austerity measures kicked in, the company has seen earnings and revenue stabilize. [Martin Marietta shares fell nearly 10% the day Einhorn disclosed his trade, but have since recovered strongly.]


With the company forecast to report growing year-over-year earnings when it discloses fourth-quarter and full-year results this week, Einhorn's short trade may be suffering from an unanticipated recovery in construction and housing markets just as government spending -- the company's largest earnings stream -- faces headwinds.


On Friday, Jefferies analyst Mike Betts upgraded his fourth-quarter and full-year earnings estimates for Martin Marietta and its principal competitor Vulcan Materials (VMC), citing stronger-than-expected aggregates and cement shipments in the U.S. reported by the likes of international players Cemex of Mexico and HeidelbergCement of Germany.


Given construction spending in the U.S., and particularly the Southeast, Betts now forecasts Martin Marietta will grow overall aggregates shipments, countering previous estimates of a near 4% fourth-quarter decline. As a result, Betts expects Martin Marietta will post fourth-quarter earnings per share of 57 cents, beating Wall Street earnings forecasts by 6 cents.


At Vulcan Materials -- a company Martin Marietta may continue to pursue as a merger target on friendly terms -- Betts expects a fourth-quarter profit that beats consensus EPS estimates by 10 cents. Betts gives both Martin Marietta and Vulcan Materials "buy" ratings and new price targets of $114 and $63, respectively.


Such forecasts could indicate continued pain for the short trade Einhorn disclosed in May. Since mid-May, Martin Marietta shares have risen over 30% from just above $75 a share to current levels of $98 a share, indicating steep losses for Einhorn -- that is, if he's still shorting the company.


Those share-price gains come amid expectations from the likes of Jefferies' Betts that Martin Marietta may be benefitting from a revival in the construction markets that drive the company's materials orders.


Betts expects "mid-cycle" earnings for the company in 2013. Such a scenario could also counter the logic underpinning Einhorn's short trade.


"Recent earnings benefited from one-time fiscal stimulus that is about to wind down," Einhorn said at the Ira Sohn conference in May. Those comments were also taken negatively for Vulcan Materials, given the prospect of a hostile or friendly merger and their similar earnings profiles.


Some analysts immediately took aversion to Einhorn's presentation and the valuation metrics he highlighted as supporting his short.


"We don't believe Mr. Einhorn's comments regarding valuation as measured by a P/E basis represent anything new," wrote Wells Fargo analyst Adam Rudiger in a May note to clients. While Einhorn focused on Martin Marietta's share valuation at a price of 35 times forward earnings as a key to his short position, Rudiger argued it was the wrong metric.


"[Investors] more frequently look at EV/EBITDA multiples when valuing aggregates companies and on that metric, Martin Marietta shares are not as richly valued."


In the fourth quarter, Einhorn's Greenlight Capital portfolio fell over 3%, damping returns for 2012 to just 3.4%, underperforming the S&P 500 ($INX) and Dow Jones Industrial Average ($INDU).


Notably, stocks in Greenlight's short portfolio rose roughly 10% in the fourth quarter, significantly outperforming index gains and hitting the fund's overall performance.


"The losses in the short portfolio were broad-based; while the S&P 500 was down modestly in the quarter, our average short rose about 10%. Green Mountain Coffee Roasters was the worst offender, with a 74% advance that wiped out our 2012 profits on the position," Einhorn wrote in a Jan. 23 investor letter. He made no mention of short positions in Martin Marietta or Moody's, which Einhorn disclosed in 2012.


Still, as Einhorn hits airwaves and investor conferences to promote a long bet on Apple and other highly watched trades like a seemingly well-timed short position on Chipotle Mexican Grill (CMG), it might be time for him to address recent trades like Martin Marietta.


Meanwhile, Einhorn may yet play a role in the debate over whether ratings agencies can be held liable for wrongheaded pre-crisis opinions, reports TheStreet.


Jonathan Gasthalter, a media spokesperson for Einhorn at public-relations firm Sard Verbinnen, declined to comment on whether Greenlight Capital continues to hold a short position in Martin Marietta.


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Feb 11, 2013 5:19PM
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