This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Einhorn's Martin Marietta Short Exposes Vulcan M&A Bulls

David Einhorn, Martin Marietta story, corrected for reference to Einhorn's short of Saint Joe Company. An earlier version of the story incorrectly referred to St. Jude Medical.

NEW YORK (TheStreet) -- Martin Marietta (MLM) is David Einhorn's new favorite stock to short. While that's a bad development for Martin Marietta's shareholders, the market reaction to Einhorn's short may reflect positively on its $6.7 billion hostile bid for competitor construction aggregates giant Vulcan Materials (VMC), which seemed all but dead earlier in May.

A recent Delaware court ruling and Vulcan Materials' insistence on staying independent made Martin Marietta's takeover attempt extremely challenged, but the near-identical late Wednesday share tumble of both companies after Einhorn revealed Martin Marietta as a short target signals that traders are still betting that the unsolicited stock offer will eventually succeed, even if terms and conditions change.

David Einhorn

Einhorn was widely expected to disclose a short position in Herbalife (HLF) at Wednesday's Ira Sohn Investor Conference in New York. Instead, the famed short seller -- who's tangled with Green Mountain Coffee Roasters (GMCR), real estate developer The Saint Joe Company (JOE) and gained his prominence for a bold call against Lehman Brothers ahead of its demise -- revealed the surprising move against Martin Marietta.

Martin Marietta shares fell over 8% to $68.60 in Wednesday trading, meanwhile Herbalife rallied over 16% to $49.51. During Herbalife's first quarter earnings call, Einhorn pressed the company on its accounting and raised questions about its growth prospects, but it is Martin Marietta's earnings that Einhorn called out as being richly valued.

"Recent earnings benefited from one time fiscal stimulus that is about to wind down," Einhorn said at the conference. Those comments aren't just a negative for Martin Marietta, they also reflect poorly on Vulcan's 2012 outlook. Both companies are the top two players in producing construction aggregates or crushed gravel and stone that's used to build roads and other infrastructure.

"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 note to clients reacting to Einhorn's short. 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 argues it may be the wrong valuation 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."

Still, it's Vulcan Materials, a bystander to Einhorn's short position, that may be the most interesting stock to watch.

In the moments after Einhorn disclosed his short, Sachin Shah, a special situations strategist with Tullett Prebon says that the spread on Martin Marietta's share exchange offer for Vulcan Materials rose from around $1 to $3.32. If traders were shorting that spread with the expectation that a deal will occur, Shah says Wednesday share gyrations could have yielded a quick $2 return as the spread quickly narrowed from $3.32 to below $1.

"People realized at the end of the day nothing changed about a possibility of a deal, it just changed what Martin Marietta would have to offer Vulcan Materials," says Shah. Martin Marietta's $6.7 billion share offer to acquire Vulcan Materials, a company with more than double its revenue, was contingent on a conversion that gave Vulcan shareholders 0.5 Martin Marietta shares for each share.

By Wednesday's close, an almost identical share drop of Martin Marietta and Vulcan -- and an end of the day merger spread of less than $1 -- signaled that traders expect the share conversion to remain in place, even as the hostile bid came against large difficulties in May.

"The market is saying that Martin Marietta is still pursuing the Vulcan Materials transaction," says Shah. He adds that Einhorn's short gives credence to Vulcan Materials resistance to the share offer launched in December.

If Martin Marietta's M&A fortunes were to change in courts, Shah says the company will need to address points made by Einhorn and help investors understand the company's worth, which has fallen from nearly $90 a share in mid-February to $66.75 in early Thursday trading. Only then can shareholders and both companies re-address a fair merger price.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,122.01 +15.31 0.09%
S&P 500 2,000.12 +0.10 0.00%
NASDAQ 4,569.6210 -1.0160 -0.02%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs