Third Avenue Management

Third Avenue Management

Last Update: 2014-11-14
Related: Martin Whitman

Number of Stocks: 146
Number of New Stocks: 16

Total Value: $4,766 Mil
Q/Q Turnover: 12%

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

Third Avenue Management Watch

  • Martin Whitman's Third Avenue 4Q 2014 Shareholder Letter

    Dear Fellow Shareholders,

    Efficient Market Theorists (EMTs) place a premium value on being ignorant about companies and the securities the companies issue. Such EMTs include most financial academics as well as promoters of Index Funds and Exchange Traded Funds (ETFs) such as John C. Bogle, founder of the Vanguard Group. For these EMTs, research is restricted to studying markets and security price fluctuations. To EMTs the study of companies and securities is someone else’s business.


  • Third Avenue Management's Amit Wadhwaney On Holding Companies

    The most impressive thing about Warren Buffett (Trades, Portfolio) is that he has created his huge wealth by repeatedly making great investment decisions.

    To be like Warren, and be able to achieve investment success across various industries and types of companies, we need to have more than one tool in our toolbox.


  • Third Avenue Management Comments on Posco

    Posco (PKX) 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 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.


  • 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.


  • Third Avenue Management Comments on BNY 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.


  • 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.


  • 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.


  • 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.

    From Third Avenue Management (Trades, Portfolio)'s second quarter 2014 shareholder letter.  

  • Third Avenue Management Comments on AGCO Corp

    Fund Management initiated a position in the common stock of AGCO Corp. (AGCO) ("AGCO") during the quarter. AGCO is a pure-play agricultural company dedicated to farm machinery, grain storage solutions and protein production equipment. it is a global company with sales generated across the following geographies: 23% U.S., 53% Europe, 23% latin america and 1% asia pacific. it maintains an investment grade balance sheet, is highly cash generative, and has been consistently profitable. Despite these appealing characteristics, the current valuation is depressed due to short-term concerns.

    agricultural spending drives aGCO's top-line and it is primarily driven by farm income. Farm income has grown rapidly in the U.S. over the past five years and many are projecting that spending growth will slow down or decline in the near term. This is putting pressure on agricultural- related companies like aGCO (See aGCO's valuation history below). Agco 10 -year Valuation History Source: Capital iQ Note: Hi: 8.2X, low: 2.0X, average: 7.3X although we agree that agricultural spending will likely be challenged in the near term, there are mitigating factors to combat slowing end-market activity. First, aGCO's exposure to North america is only 23%, which trails peers by wide margins. Over half of aGCO's sales are in Europe. There seems to be less risk in Europe, as farm incomes have been more stable when compared to U.S. farm incomes. Second, aGCO's operating margins are lower (8%) than peers and management is focused on improving them to double digit rates. Management's potential to improve margins provides a cushion to sluggish sales. Finally, management has responded to the attractive valuation by implementing a $500 million stock buyback program (roughly 10% of current market capitalization) and has been aggressively purchasing shares at current prices.


  • Third Avenue Management Comments on SemGroup

    In early August SemGroup (SEMG), an owner and operator of oil and gas midstream assets, including pipelines and storage and blending facilities, closed on an opportunistic purchase of assets from Chesapeake Energy. The assets nicely complement SemGroup's existing core assets that stretch from Colorado to Oklahoma. While SemGroup will have to spend money to complete the assets—money that financially distressed Chesapeake likely could not justify—we view the expenditures favorably given their high return characteristics.From Third Avenue Management's fourth quarter 2013 commentary.  

  • Third Avenue Management Comments on Dundee Corporation

    During the quarter the Fund established a meaningful position in shares of Dundee Corporation (TSX:DC.A), a Toronto-based holding company run by founder Ned Goodman. Having cut his teeth in investing at Brookfield Asset Management's predecessor company in the 1960s and Beutel Goodman which he co-founded in 1967, Goodman would go on to found Dundee in 1991. Goodman has been a magnificent allocator of capital at Dundee, building businesses and 11 investing in public and private companies. The uncertain macro backdrop post-Financial Crisis has given Goodman a penchant for hard assets rather than paper assets, resulting in a unique collection of investments, ranging from financial services and real estate to metals, mining, energy and agriculture businesses, including control of the largest organic beef operator in North America with more than 12,000 head of cattle. While past performance is no guarantee of future results, Dundee has generated an impressive 18% annualized return for its shareholders over the past twenty years.To understand Dundee requires a look past its income statement, where historical reported results are volatile and muddied by consolidated financials of entities no longer owned or consolidated, as well as gains on the sale of underlying securities and businesses, including the 2011 sale of a controlling stake in Dundee Wealth to Bank of Nova Scotia for C$1.4 billion and the spinout of a majority interest in Dundee Real Estate Company earlier this year. Today, Dundee's enterprise value is close to the value of its public securities holdings, net of a modest amount of debt. "Free" are the company's private investment portfolio and private subsidiaries, carried at book value, which together are close to half of Dundee's market value. While there is certainly an element of "key man risk," as any eventual successor will have enormous shoes to fill, we think hard asset values, values of publicly traded securities and a significant discount to our estimate of net asset value provide a meaningful margin of safety for the investment.We have followed Ned Goodman and Dundee for a number of years, as a like-minded operator and investor with significant ownership aligning his interests with those of his shareholders. The position reflects a true collaboration with our investment team colleagues. Vic Cunningham provided much of the recent legwork, while Ryan Dobratz offered key insights into the real estate assets and their valuations.Legg Mason is a premier mutual fund complex that dates back to the 1980s. While the firm has recently suffered significant asset outflows in the wake of subpar investment returns, the company has retained a strong franchise (with several well-known brands under its umbrella), a diversified asset mix, and a sound balance sheet. Under new leadership, the business appears to be on the mend and capital allocation continues to be favorable—management has repurchased $1.2 billion of shares in the past three years (shrinking the share count by more than 20%) and has been increasing the dividend. Moreover, the relative investment performance among its stable of investment managers is beginning to improve. While the company is still under-earning its potential in our view, its cash flows remain strong, aided by a large deferred tax asset resulting from net operating losses generated in prior periods. Fund management initiated its position in Legg Mason Common at an implied free cash flow yield of about nine percent, and we believe the company's cash flows could increase markedly in the near future if performance and asset flows continue to improve.From Dundee Corporation's fourth quarter 2013 commentary.  

  • Third Avenue Management Comments on Tellabs

    Unfortunately, though, there is a "dark side" to resource conversion activities—the dreaded "take-under", where a company is acquired for less than its value. While managements and investment bankers will often use a premium to market price to justify a transaction value, we look instead at the offer price versus intrinsic value. Tellabs' (TLAB) announcement in October to sell itself to Marlin Equity Partners, a private equity firm, is a take-under, in our opinion. Under the terms of the transaction, Tellabs agreed to a cash tender offer of $2.45 per share, which excluding the $551 million of cash on Tellabs' balance sheet, was only 0.37x revenues and attributed no value to the company's intellectual property and real estate. Third Avenue filed a Form 13D in November 2012,where we sought to reserve the right to meet with management, the Board and other shareholders in order to enhance shareholder value. Over that time, we were successful in nominating two members to the Board, and the company paid a special dividend and took steps to reduce costs. While the purchase price is disappointing, it still represents a 17% premium to the price of the stock when we filed our 13D (adjusted for dividends received), highlighting the importance of buying at a discount to NAV to provide a margin of safety. However, we acknowledge a less than optimal result over the life of this investment. The telecom equipment industry in which Tellabs participates is fraught with issues—from competition, technology leapfrogging and the need for high R&D investments, to a highly concentrated customer base and resultant pricing pressure. Despite its super-strong balance sheet, its operating and acquisitions track record was checkered.From Third Avenue Management's fourth quarter 2013 commentary.  

  • Third Avenue Management Comments on Apache

    In August, Apache (APA) announced that it agreed to sell a 33% stake in its Egyptian oil and gas business to Sinopec (SHI) for $3.1 billion. This price equated to $34 per barrel of proved reserves, or a significant premium to the valuation of Apache common of about $15 per barrel prior to the announcement of the transaction. Given the recent political turmoil in Egypt, we were pleasantly surprised at the higher

    than expected price received. Apache expects to use the proceeds to reduce leverage, buy back shares and fund other capital spending—in effect using the proceeds from one value enhancing resource conversion to fund other types of desirable conversion events. With this sale, the company will have sold around $7 billion of assets this year, well above its previous plans to sell $4 billion of assets, enabling it to diversify more into North America on-shore.From Third Avenue Management's fourth quarter 2013 commentary.   

  • Third Avenue Management Comments on Applied Materials and Tokyo Electron

    In September, Applied Materials (AMAT) announced plans to merge with Tokyo Electron ("TEL") (TSE:2760). Both Applied Materials and TEL are well respected in the semiconductor equipment industry. We initially invested in Applied during a cyclical downturn in the industry, yet with the belief that growth prospects were bright over the longer term due to continuing technology transitions as semiconductor chips get smaller and more complex and the potential for Applied Materials, specifically, to gain further market share. The transaction is structured such that Applied Materials shareholders will own 68% of the new company with TEL shareholders getting the remainder. The benefits of the merger for Applied shareholders include expanded market opportunities (particularly in processes such as etch and selective materials removal) and more efficient research and development. The companies estimate potential synergies totaling $250 million at end of the first year and $500 million by the end of the third year, driven from enhanced efficiencies in the supply chain, manufacturing, IT and corporate overhead. While we are optimistic about consolidation in the industry longer term, Applied's stock price increased on news of the transaction to a level where the valuation was not as attractive as other opportunities and we exited the position, locking in our 25% internal rate of return on our investment.From Third Avenue Management's fourth quarter 2013 commentary.  

  • Third Avenue Management Comments on Vodafone

    Fund Management initiated a position in Vodafone (VOD) Common during the quarter. Vodafone is a leading provider of telecommunications services based in the United Kingdom. This investment is discussed in more detail in this quarter's Third Avenue International Value Fund shareholder letter. The Vodafone common investment made by the Fund was prompted by the company's sale of its 45% stake in Verizon Wireless at a tremendous price (9.4 times EBITDA). Shares of Vodafone Common were purchased at less than five times pro-forma EBITDA and at a mid-single digit dividend yield in the Fund. Although conditions in the European telecommunications industry are difficult, Vodafone's business is very cash generative and the proceeds from the Verizon Wireless transaction will enable the company to reinvest more in its networks than many of its competitors while maintaining a very strong financial position and a healthy dividend. Vodafone also has substantial exposure to emerging markets, such as India and Africa, that are experiencing tremendous growth in demand for smart phones and data.

    From Third Avenue Management's fourth quarter 2013 shareholder letter.  

  • Billionaires Hot for Coal on a 52-week Low

    Based on the first eight months of the year, U.S. coal production is down by 3% year over year, as reported by the U.S. Energy Information Administration. The U.S. coal industry sector currently has seven companies out of 22 on a 52-week low but only two Midwestern companies, Cloud Peak Energy Inc. (CLD) based in Wyoming, and Hallador Energy Co. (HNRG) based in Colorado, have billionaire guru stakeholders, as of the second quarter of 2013.

    Coal Sector Highlight: Cloud Peak Energy Inc. (CLD)  

  • Third Avenue Management’s High-Return Four

    Third Avenue Management, considered a “balance sheet investor,” has a portfolio of 145 stocks, 18 of them new, and a total value of $5.09 billion, with a quarter-over-quarter turnover of 8%. The portfolio is currently weighted with top three sectors: financial services at 20.5%, basic materials at 15% and technology at 14.9%. The firm has averaged a return of 11.41% over 12 months. In 2012, Third Avenue Management returned 27.48% against the S&P500’s 15.4%.

    Led by its founder and chairman, Martin Whitman, Third Avenue Management measures a company’s value based on its current balance sheet versus projected earnings and revenues. As such, Third Avenue Management is focused on the here and now reality of a business, investing in safe companies that are priced low.  

  • Third Avenue Management Comments on Susser Petroleum Partners

    Susser Petroleum Partners (SUSP): In September 2012, Susser spun off its Susser Petroleum Partners ("SPP") wholesale fuel business into a Master Limited Partnership (MLP) structure that provides fuel to Susser, as well as to third parties. While this structure creates a degree of "analytical noise" as it relates to the company's reported GAAP financials, it creates a more appropriately valued "currency" for SPP that it can use for growth and acquisitions while it effectively lowers Susser's cost of capital. Moreover, in addition to being the controlling general partner and majority limited partner of the MLP, Susser also holds a hidden asset of sorts in the form of Incentive Distribution Rights (IDRs) which effectively entitle Susser to an increasing portion of the MLP's distributions as it grows. While the distributions will likely be modest over the near term, SPP has attractive growth opportunities over the long-term through organic growth, acquisitions, and Susser stores being "dropped down" into the MLP via sale-leaseback transactions. The business model also provides a significant competitive advantage to Susser as it is able to take advantage of SPP's combined retail and wholesale fuel purchasing volume to obtain attractive pricing and terms.

    • Financial position: Since coming public in 2006, the strength of Susser's balance sheet has steadily improved. In the wake of the SPP initial public offering and resulting proceeds, Susser has been able to refinance its debt at attractive rates and ultimately reduce its net debt to about one times EBITDA 3 (down from about four times EBITDA in 2007).  

  • Third Avenue Management Comments on Brookdale Senior Living

    Brookdale Senior Living Brookdale (BKD) is the largest operator of senior housing assets in the United States, with approximately 549 centers and 48,000 units. Brookdale provides room, board and hospitality services to the elderly, primarily 80 years old and older, who are generally in good health but require a base level of healthcare, with a primary focus on private pay  

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