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Is David Einhorn In More Trouble At Marvell?

David Einhorn Greenlight CapitalDuring the second quarter, billionaire David Einhorn’s Greenlight Capital bought 7.2 million shares of Marvell Technology Group Ltd. (NASDAQ:MRVL), an increase of nearly 40% in the fund’s position. At the end of June Greenlight owned 25.6 million shares, and the processor and data storage company was one of its five largest holdings by market value (find more of billionaire David Einhorn’s favorite stocks). Last week Marvell Technology Group Ltd. announced that its sales figures for the third fiscal quarter (which will end at the end of October) would be about 4% lower than the company’s previous guidance. With that figure already considerably lower than analyst expectations, the revision came as particularly bad news and the stock dropped 14% on the day. It is now down 33% from the end of the second quarter, and 46% from the beginning of the year. Marvell’s CFO has also resigned.

The midpoint of the revenue range that the company issued was $775 million, which would be down 5% on a q/q basis. The second quarter, in turn, showed sales that were down 9% from the same period in 2011. Net income had fallen over 50%, and earnings per share had been 16 cents. Annualizing that figure- which should be higher than what Marvell Technology Group Ltd. experiences in the current quarter- gives a P/E multiple of 12 at the current stock price. Of course, we would expect that this quarter will show lower profits given the worse top line. Sell-side analysts had been very optimistic at the prospect for a recovery at Marvell, and their earnings consensus had implied a forward P/E of 5 and a five-year PEG ratio of 0.7. It does appear, however, that the decline of the PC industry- which the company has blamed on poor macro, but certainly is also due to a consumer shift towards tablets- is going to continue to hurt the business.

Kerr Nielson’s Platinum Asset Management and Bill Miller’s Legg Mason Capital Management may also have been stung by the recent decline in Marvell’s stock price. Platinum had reported a position of 12 million shares at the end of June, while Legg Mason had increased its stake by 32% over the course of the second quarter. See more stocks from Platinum Asset Management and from Legg Mason Capital Management.

Marvell’s peers include LSI Corporation (NYSE:LSI), STMicroelectronics N.V. (NYSE:STM), Texas Instruments Incorporated (NASDAQ:TXN), and Broadcom Corporation (NASDAQ:BRCM). The first two of these peers are about the same size as Marvell in terms of market capitalization, with all three valued at between $3.5 and $6 billion. In the second quarter of the year, STMicroelectronics’ revenue was down 16% versus a year earlier and poor business contributed to the company being unprofitable on a trailing basis; while LSI’s sales were up, its earnings were down 80%. LSI, similarly to Marvell, has quite a bit of support from Wall Street analysts: it trades at 8 times forward earnings estimates and a five-year PEG ratio of 0.5. STMicroelectronics has a forward P/E of 16, which represents consensus that the company will be profitable in 2013.

Texas Instruments and Broadcom are considerably larger, at market caps of $32 billion and $19 billion respectively. Broadcom has been hurt by lower margins, with its revenue higher but earnings lower in its most recent quarter than in the same period a year ago. It trades at 24 times trailing earnings, but it is another analyst darling and trades at only 11 times forward earnings estimates. Texas Instruments had its net income drop sharply over the same time frame, mostly driven by lower margins as well. The large semiconductor company carries a forward P/E of 14.

We’re generally wary of all of these companies, including Marvell. Their forward valuations are attractive, but those are highly dependent on getting considerably higher net income next year than they have seen in the past few quarters.

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