Martin Whitman

Martin Whitman

Last Update: 2014-09-17
Related: Third Avenue Management

Number of Stocks: 37
Number of New Stocks: 2

Total Value: $2,072 Mil
Q/Q Turnover: 8%

Countries: USA
Details: Top Buys | Top Sales | Top Holdings  Embed:

Martin Whitman Watch

  • Third Avenue Value Fund Comments on Weyerhaeuser Co

    The Fund initiated a position in Weyerhaeuser (WY) as the company moved to finalize the distribution of its WRECO homebuilding subsidiary in an exchange offer with Tri Pointe Homes Inc. Weyerhaeuser is a Real Estate Investment Trust with wood products and wood fiber businesses, and the second largest owner of timberlands in the U.S. It is worth noting that Weyerhaeuser was sourced with TAM’s Real Estate team and is a solid example of the ability of the Fund to pull ideas from across the entire TAM research team. The Reverse Morris Trust distribution of WRECO was structured as an exchange offer, whereby shareholders could choose to accept shares in the new Tri Pointe, or to retain their interest in Weyerhaeuser. We chose not to indicate for Tri Pointe shares, and were pleased that the exchange offer was oversubscribed so that we retained our full position in Weyerhaeuser. The net effect of the transaction from our perspective was a resource conversion event in which WRECO was traded for a large repurchase transaction, representing roughly 10% of Weyerhaeuser shares plus $700 million in cash.


    We see the remaining businesses of Weyerhaeuser, led by CEO Doyle Simons, trading at a substantial discount to our estimated NAV combined with a solid outlook of secular growth, selfhelp margin improvement initiatives and a good way to gain exposure to a recovery in the U.S. housing market.

      


  • Third Avenue Value Fund Comments on Apache Corporation

    Apache (APA) is transforming its holdings from a diversified array of E&P assets to one that is more focused on unconventional onshore liquids plays. We expect the company to live within its cash flow, excluding the CAPEX required for its two liquid natural gas (LNG) projects, Wheatstone and Kitimat. Longer term, we think Apache will at least partially monetize LNG projects, which are operated by Chevron, to focus on higher return projects that support production and cash flow growth. Although not expected nor central to our investment thesis, the recent involvement from JANA Partners further validates our view that significant value remains under‐appreciated within Apache’s still fairly diverse portfolio of E&P assets.


    From Third Avenue Value Fund’s Third Quarter 2014 Commentary.

      


  • Third Avenue Value Fund Comments on Devon Energy Corp

    Devon (DVN) has benefitted from the merger of Crosstex Energy with Devon’s midstream assets to form the EnLink MLP which strategically unlocked billions of dollars of value that was hidden in these assets. Devon now is focused on the development and optimization of its five premier asset plays, including its prolific Eagle Ford assets and its Permian basin acreage. These actions have transformed Devon from a primarily natural gas producer to a more balanced oil and gas company.


    From Third Avenue Value Fund’s Third Quarter 2014 Commentary.

      


  • Third Avenue Value Fund Comments on Encana

    Encana (ECA) was a pure play natural gas company when fracking technology dramatically expanded the supply of natural gas on the North American market. The company initially struggled to optimize its capital allocation across a very broad portfolio of assets, concentrated on gas. Under the new leadership of CEO Doug Suttles, the company unveiled a strategic shift to focus on its five core liquids‐rich plays in North America. Suttles moved to monetize underutilized assets including the sale of the Jonah, Big Horn and East Texas properties for over $4 billion and focus on the highest return assets.


    From Third Avenue Value Fund’s Third Quarter 2014 Commentary.

      


  • Third Avenue Value Fund Comments on Intel Corp

    A case in point is Intel (INTC), a well‐financed leader in designing and manufacturing microprocessor chips. We invested in Intel common stock early 2013 when the shares sold off meaningfully on investor fears of a poor near term outlook due to weak PC end‐user demand and general macro related weakness in IT spending. In our view, these shorter term, more macro related concerns were ignoring Intel’s solid franchise in microprocessors for PCs and servers, which it has continued to enhance through its technological and manufacturing leadership. While Intel faces challenges in trying to capture share in faster growing mobile markets, we believe that there is substantial value in its core businesses. There are reportedly some 600 million PCs that are four years old or older vs. typical replacement cycle at around three years. Given the proliferation of new applications, many of which require greater computing power, an upgrade of one's PC, particularly in the workplace, eventually becomes a necessity. For anyone who has experienced the frustration of trying to work on an older PC, watching the hourglass or equivalent thereof, slowly spin as an application is loading, you know what we mean! Further, we were being paid to wait, as the stock paid a 4.3% dividend; the Fund was able to acquire shares at around 4.6 times EBITDA and 10 times earnings.


    The strengths of Intel showed through in its second quarter 2014 earnings report which benefitted from an improvement in PC demand, helped by upgrades driven by the expiration of support for Windows XP and a realized 11% increase in pricing in its data center offerings, where Intel continues to be the market leader. We did take advantage of a rise in the stock price to trim the Fund’s position as shares rose approximately 30% year to date and moved closer to our NAV target.

      


  • Third Avenue Value Fund Comments on Comerica Inc

    We have preferred regional banks for three reasons. First, at TAM we focus on price to tangible book value (P/TBV) as opposed to simple P/B. Tangible book value is a better measure of intrinsic value as it excludes intangible assets which wouldn’t carry much value in liquidation. As discussed earlier, one of the dimensions we focus on as we evaluate companies is the assets. The valuations of KEY and CMA are much closer to peers listed above on a P/TBV basis. Evaluating just a single statistic may provide misleading conclusions when evaluating an investment. Thus, we also consider how well a company can compound its book value over time. As seen in the table above, both KEY and CMA are generating higher returns on assets (ROA) than peers. This is important as companies that generate higher returns deserve premium valuations. Again, we distinguish among the many metrics. We focus on ROA as the measure of ROA does not favor companies that carry higher leverage and perhaps higher risk.


    Second, the Tier 1 Common Equity ratios for KEY and CMA compare favorably against the money center peers. This metric indicates that the Fund’s regional banks are as well, if not better, capitalized than money center banks. As discussed in the opening paragraphs of the letter, the integrity of the balance sheet is a key dimension to our analysis.

      


  • Third Avenue Value Fund Comments on KeyCorp

    We have preferred regional banks for three reasons. First, at TAM we focus on price to tangible book value (P/TBV) as opposed to simple P/B. Tangible book value is a better measure of intrinsic value as it excludes intangible assets which wouldn’t carry much value in liquidation. As discussed earlier, one of the dimensions we focus on as we evaluate companies is the assets. The valuations of KEY and CMA are much closer to peers listed above on a P/TBV basis. Evaluating just a single statistic may provide misleading conclusions when evaluating an investment. Thus, we also consider how well a company can compound its book value over time. As seen in the table above, both KEY and CMA are generating higher returns on assets (ROA) than peers. This is important as companies that generate higher returns deserve premium valuations. Again, we distinguish among the many metrics. We focus on ROA as the measure of ROA does not favor companies that carry higher leverage and perhaps higher risk.


    Second, the Tier 1 Common Equity ratios for KEY and CMA compare favorably against the money center peers. This metric indicates that the Fund’s regional banks are as well, if not better, capitalized than money center banks. As discussed in the opening paragraphs of the letter, the integrity of the balance sheet is a key dimension to our analysis.

      


  • Third Avenue Value Fund Third Quarter 2014 Commentary

    Dear Fellow Shareholders,


    One of the common questions our fellow shareholders have asked recently is whether we are able to find good value investments given the strength of the markets, especially in the U.S. where the broad market indexes are near all‐time highs. The short answer is absolutely. While current earnings and price trends are important, our investment process extends well beyond them. Our process is rooted in evaluating the entire enterprise, as opposed to focusing on more idiosyncratic quarterly earnings reports. In our analysis we are essentially counting up the assets and ascertaining a fair NAV for a company as if we were purchasing the entire business. From there we assess the company's balance sheet and credit profile, to ensure that it has the financial capacity to meet obligations and investment opportunities, as well as the ability to survive market storms.

      


  • Martin Whitman Third Quarter Letter to Shareholders

    Dear Fellow Shareholders,


    Most businesses (and governments) which are successful achieve success by creating wealth while consuming cash. In most cases, consuming cash carries a fair amount of investment risk because consuming cash requires the business to have access to capital markets, sometimes continuously as is the case for commercial banks and broker‐dealers. Capital markets are notoriously capricious, sometimes not available at all – see the 2008‐2009 financial meltdown; and sometimes are a source of almost free money – see the 1999-2000 IPO bubble.

      


  • Third Avenue Management Comments on Toyota

    Perhaps because it has "Toyota" (TM) in its name or perhaps because it spun out Toyota Motor years ago, many people view Toyota industries as largely an automotive parts type company. it is, but also derives around 50% of operating income from its material handling equipment business, where it is the global market share leader. The company also has a logistics segment and a textiles machinery business. The company is profitable and growing and, furthermore, has an attractive investment securities portfolio, the value of which exceeds Toyota industries' current market value. The businesses are separable but not likely saleable (perhaps if it were not a Japanese company). Changes in corporate governance are afoot in Japan. The government is working on new corporate governance rules requiring independent directors, or in the absence of that, an explanation of deviations. Further, Japan is working on a Stewardship Code to encourage institutional investors to disclose their proxy votes and engage in dialogue with companies on issues that could impact long-term share value. a new stock index, the JPX- Nikkei 400, highlights this new focus. To be included in the index, companies must meet certain corporate governance and profitability requirements.

    From Martin Whitman (Trades, Portfolio)'s 2Q 2014 Shareholder Letters.  


  • Third Avenue Management Comments on Symantec

    Symantec (SYMC) operates in security software and IT storage management businesses with its well-known brands, such as Norton. Recently, it has experienced management turnover, with its second CEO terminated by the Board in as many years. The surprise announcement was due to what appears to be slower than expected execution of a previously announced new strategy. The company had already started to embark on its new strategy to improve growth capabilities, including restructuring the sales force and eliminating duplicative organizational and operating structures. While not central to our original investment thesis, we have long thought that the company's businesses seem separable and saleable. Strategic firms could be potentially interested in its various businesses, though it could also be interesting to private equity firms given the strong cash flow characteristics of the business.

    From Martin Whitman (Trades, Portfolio)'s 2Q 2014 Shareholder Letters.  


  • Third Avenue Management Comments on Bank of New York Mellon

    BNY Mellon (BK) ("BK") participates in two businesses –asset management and investment servicing. The company had $1.6 trillion in assets under management and $27.9 trillion of asset under custody and/or administration, as of March 31, 2014. The businesses seem separable and more valuable on a sum-of-the-parts basis. The asset management business with its iconic Dreyfus Funds and stable of boutique managers could certainly be a stand- alone entity or would seem to attract interest from strategic or financial buyers. BK has been in the news recently given more shareholder scrutiny of its operating efficiency. Recently, there have been news reports that BK could be looking to sell its Corporate Trust unit, which has been a detractor due to the run-off of high-margin securitizations.

    From Martin Whitman (Trades, Portfolio)'s 2Q 2014 Shareholder Letters.  


  • Third Avenue Management Comments on Cavco Industries

    The Fund's largest position is the common stock of Cavco industries inc. (CVCO), which represented 5.6% of the Fund's net assets as of quarter end. Since Cavco is not a household name, we thought it would be helpful to discuss the history of the investment and why we are so excited about its future. The Cavco investment originated during the 2008 financial crisis. Fleetwood Enterprises, a leading producer of manufactured homes and recreational vehicles ("RVs") had filed for bankruptcy, and its announcement of the sale of its RV business in a bankruptcy auction indicated that the manufactured housing business could be available on similar terms. Fund Management had long followed the manufactured housing industry and knew that Fleetwood had a strong brand name and reputation as a quality manufacturer. Fund Management contacted Joe Stegmayer, the Chairman and CEO of Cavco, to discuss the situation and learned that Cavco was also interested in the Fleetwood manufactured housing business. Fund Management had known Joe Stegmayer for many years, dating back to when he was president of industry leader Clayton Homes, and had tremendous respect for his managerial capabilities. Cavco was a small (three plants) regional manufactured housing producer based Arizona. Under Joe Stegmayer's prudent management, the company had maintained generally profitable operations and a strong, debt free balance sheet during the long industry downturn (See Manufactured Housing Shipments chart that follows on the next page ). Therefore, the company was in position to consider acquisitions. However, given Fleetwood's considerably larger size, Cavco wanted a financial partner for the acquisition, and, hence, we formed a 50-50 joint venture company ("Fleetwood Homes") to purchase the Fleetwood assets. The Fund and Cavco each contributed $35 million to fund the joint venture.

    Fleetwood's manufactured housing assets, consisting mostly of seven manufacturing plants, were purchased by our joint venture for $26 million in august 2009 at a bankruptcy auction. The only other bidder for the assets was Clayton Homes, which is now owned by Berkshire Hathaway. Under the terms of our joint venture agreement, Cavco operated the assets. Impressively, despite continued industry weakness, Cavco was able to operate Fleetwood profitably in 2010. Therefore, when a larger, vertically integrated competitor, palm Harbor, experienced financial distress in 2010, Fund Management was willing to make an additional contribution to the joint venture ($36 million) to pursue this attractive expansion opportunity. after much negotiation and diligence on palm Harbor, the Fleetwood Homes joint venture agreed to provide debtor in possession ("Dip") financing for palm Harbor's November 2010 bankruptcy filing. In 2011, Fleetwood Homes rolled this Dip loan into a purchase of substantially all of palm Harbor's assets for $84 million at another bankruptcy auction. These assets consisted mostly of five manufacturing facilities, 49 retail outlets and 100% of the common stock of profitable insurance and finance subsidiaries that had not filed for bankruptcy.

    In 2013, the Fund sold its stake in the Fleetwood Homes joint venture to its partner, Cavco, in exchange for approximately 21% of Cavco's common stock. The sale price equated to a 29% premium to our cost, but, more importantly, the Fund received Cavco stock at $49 per share, compared to $78 as of quarter end. Fund Management wanted to take Cavco common stock as opposed to cash because we believe the company's long- term prospects are very attractive.

      


  • Third Avenue Management Comments on Chong Hing Bank Ltd

    The majority, 77%, of the Fund’s Chong Hing (HKSE:01111) Common position was accepted for tender by Yuexiu Financial Holdings, part of the Yue Xiu Group, a Chinese company. As discussed in the 2013 year end letter, Fund Management was very pleased with the price of this transaction (2.4 times book value, including a special dividend), particularly considering that the shares had been purchased below book value.

    From Martin Whitman (Trades, Portfolio)'s 2Q 2014 Shareholder Letters.  


  • Third Avenue Management Comments on Vodafone

    Additional shares of Vodafone (VOD) Common were purchased following the completion of the company's sale of its 45% stake in Verizon Wireless to Verizon. This transaction resulted in a significant distribution to shareholders consisting mostly of Verizon common stock and also of cash. Fund Management elected to sell the Verizon shares owing to concerns about slowing growth and increasing completion in the US along with the company's leveraged balance sheet. Vodafone has a very strong financial position and is well positioned to benefit from consolidation in the European telecommunication market and growth in emerging markets. Vodafone Common accounted for 2.5% of the Fund's net assets at quarter end.

    From Martin Whitman (Trades, Portfolio)'s 2Q 2014 Shareholder Letters.  


  • Third Avenue Management Comments on White Mountains

    Property and casualty insurance companies (Alleghany Common and White Mountains (WTM) Common). Both companies have generated solid (high single digit) annual book value growth since the Fund invested in 2012 despite a challenging environment characterized by low interest rates and competitive underwriting. Shares of both companies, which account for 3.1% of the Fund’s assets in total, were purchased at modest discounts to book value.

    From Martin Whitman (Trades, Portfolio)'s 2Q 2014 Shareholder Letters.  


  • Third Avenue Management Comments on Alleghany

    Property and casualty insurance companies (Alleghany (Y) Common and White Mountains Common). Both companies have generated solid (high single digit) annual book value growth since the Fund invested in 2012 despite a challenging environment characterized by low interest rates and competitive underwriting. Shares of both companies, which account for 3.1% of the Fund’s assets in total, were purchased at modest discounts to book value.

    From Martin Whitman (Trades, Portfolio)'s 2Q 2014 Shareholder Letters.  


  • Third Avenue Management Comments on Posco

    The position in Posco (PKX) common was increased slightly at about a 50% discount to book value. Despite excess capacity and pricing pressure in the global steel industry, particularly in China, Posco's steel business continues to perform relatively well as evidenced by its 7% operating margin in both 2013 and the first quarter of 2014. The company continues to have a strong financial position, and its recent investments in non-steel businesses should start to contribute more meaningfully over the next couple of years, particularly in energy (more on this later in this letter). Posco common accounted for 5.4% of the Fund's net assets at quarter end.


    Posco recently experienced a change in management. The new CEO, Oh-joon Kwon, started in March 2014. He had previously been the Chief Technical Officer. His stated mission is to reform the company and, to that end, four out of five board members have been replaced and three new outside directors added. His focus is on enhancing the existing business via organic growth and reducing leverage, whereas the prior CEO's focus was more about empire building. Despite the weakness in the steel business due to macroeconomic challenges, Posco has a substantial non-steel business. For example, via its stake in Daewoo international, Posco participates in the profits of Daewoo's Myanmar gas field which is just starting to ramp up. The field began production in June 2013 and was producing only 20% of potential production capacity in the fourth quarter of 2013. Posco expects the project to provide 150 billion KRW in pre-tax income in 2014, growing to KrW300 billion in 2015. Posco also has potential growth opportunities from its Engineering and Construction business and opportunities to divest non- core assets. Recent media reports suggest the company seeks to raise 2 trillion won by selling assets and is seeking to make an initial public offering of some of its affiliates including Posco Energy, Posco Engineering and Posco Specialty Steel.

      


  • Third Avenue Management Comments on Apache

    Oil and gas exploration and production (“E&p”) companies (Encana Common and Apache Common (APA)). Shares of both companies were purchased below our estimates of net asset value, despite generally improving business fundamentals, particularly for natural gas.

    From Martin Whitman (Trades, Portfolio)'s 2Q 2014 Shareholder Letters.  


  • Third Avenue Management Comments on Encana

    Oil and gas exploration and production (“E&p”) companies (Encana Common (ECA) and apache Common). Shares of both companies were purchased below our estimates of net asset value, despite generally improving business fundamentals, particularly for natural gas.

    From Martin Whitman (Trades, Portfolio)'s 2Q 2014 Shareholder Letters.  


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