Third Avenue Management

Third Avenue Management

Last Update: 06-08-2016
Related: Martin Whitman

Number of Stocks: 114
Number of New Stocks: 12

Total Value: $2,600 Mil
Q/Q Turnover: 8%

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

Third Avenue Management Watch

  • Chip Rewey Cuts General Motors Position in Half

    Third Avenue Value Fund manager, Robert “Chip” Rewey, slashed 696,700 shares of General Motors (NYSE:GM), a 53% reduction to his position, during the second quarter. The sell had a -1.75% impact on the Third Avenue Value Fund portfolio.



  • Third Avenue Comments on Visteon Corp

    An example of one of our portfolio holdings which has had, and continues to have, opportunities for self-help is Visteon Corp. (NYSE:VC), a well-capitalized automotive electronics company. The stock was a top contributor to the Fund's performance during the quarter, with a total return of 19.1%.

    Visteon provides products to automotive OEMs (original equipment manufacturers) such as Ford, GM, Daimler, BMW, Nissan and Honda for their digital cockpits, i.e., the instrument cluster, information displays and infotainment - each of which has a presence in the connected car. Comparing today's cars to those just five years ago, the amount of additional functionality is amazing - from infotainment that connects to your smartphone to driver assistance safety features such as rear back-up cameras, collision detection, and blind spot and lane departure warnings. Integrated instrument clusters can be personalized if,for example, you'd rather see the weather than your tachometer. There are even over-the-air software upgrades where, instead of having to take your vehicle to the dealer for an update, the upgrade can happen seamlessly while you're asleep and your car is in your own driveway.

    The media is abuzz about self-driving cars and the car as an extension of people's mobile life. For the auto OEMs, having connectivity is a strategic differentiator and one that can be the deciding factor to a customer when choosing a particular car. Visteon is an enabler of connectivity with its cockpit electronics products - it enables the information to be gathered from various sources and displayed in the vehicle.

    Visteon's roots can be traced back to its role as an automotive supplier to Ford Motor, providing climate control systems, electronics and interiors. The company was spun off in 2000, but then fell upon difficult times during the financial crisis. It reorganized and emerged from Chapter 11 in 2010. Two years later, management embarked upon a path to shift to higher margin products, deciding to exit the commodity interiors business and ultimately deciding to sell its stake in its climate control business to focus solely on electronics. It is here that the Fund got involved with Visteon. Management sold its stake in the climate control business at an attractive 10x EBITDA valuation and committed to return a substantial portion of the proceeds to shareholders. It had also acquired the automotive electronics business from Johnson Controls to bolster its overall electronics business and was actively pursuing new business wins with OEMs as well as reaffirming its technological strength and longer-term roadmap to re-win existing platforms. Further, a new CEO, Sachin Lawande, was brought in. Sachin had previously been the president of the Infotainment division at peer company, Harman. Since his arrival at Visteon, he has brought in additional talent along with a greater focus on software development, a key driver for this business.

    Visteon continues on its path to building value. Even after a sizable capital return, the company maintains a net cash position. It remains focused on driving growth with its presence in the connected car. It has won business across various classes of vehicles from luxury to mid/entry level. It achieved its targeted cost synergies related to the acquisition of the JCI automotive electronics business ahead of plan, and has targeted reducing overhead costs further to improve margins. Adjusted EBITDA margins have improved from 7.2% in 2014 to 9.5% in 2015 and 11.9% in the first quarter of 2016.

    We remain excited about the prospects for growth at Visteon as it expands its presence in the connected car and believe the stock, at current levels, still represents significant upside to our estimated NAV.

    From Chip Rewey's second quarter 2016 Third Avenue Small-Cap Value Fund letter.


  • Third Avenue Comments on NetScout Systems Inc.

    NetScout Systems Inc. (NASDAQ:NTCT) Near-term concerns over a slowdown in carrier spending provided us an opportunity to acquire shares of NetScout common at a substantial discount to our estimate of NAV.

    NetScout is a well-financed provider of 24x7 network monitoring solutions to carriers and enterprises. Its offerings provide high-quality performance analytics that help its customers resolve technology issues that could negatively impact service quality and/or result in outages/downtime and compromised security. Last year, the company acquired certain communications assets from Danaher which doubled its addressable market by broadening its product offerings, providing an entrée into the cyber security space and increased its distribution. Cost synergies estimated at around $45-55 million are expected from the elimination of redundancies and economies of scale, with additional synergies generated over time as the company moves toward common infrastructure platforms, distribution and support programs.

    In the long term, demands for increasing amounts of data seem to continue unabated (not only Big Data but more and more use of streaming video!), requiring more monitoring and troubleshooting of network traffic which should benefit NetScout. For carriers, the cost of monitoring to keep existing customers happy with their service is a small price to pay compared to the cost to acquire new customers.

    From Chip Rewey's second quarter 2016 Third Avenue Small-Cap Value Fund letter.


  • Third Avenue Comments on Kennedy Wilson Holdings

    Kennedy Wilson Holdings, Inc. (NYSE:KW) During the quarter, the Fund was able to acquire shares of Kennedy Wilson Common at a substantial discount to our estimate of NAV, as the general market sell off, combined with unfounded fears of market liquidity for deals, pushed the stock down significantly.

    Kennedy Wilson Holdings (Kennedy Wilson) is a U.S.-based real estate operating company. The company is an integrated global real estate investment and services company with a $2 billion portfolio of investments in a diversified mix of commercial and residential assets. In addition, Kennedy Wilson has more than $18 billion of assets under management (AUM) on behalf of third parties.

    The management team owns 18% of the company's stock and has historically been a savvy capital allocator, having made substantial investments in Japan during the 1990s, in the U.S. following the financial crisis, and in Europe and the U.K. in more recent years. The template has been the same in all markets: invest capital in out-of-favor regions or property types at substantial discounts to underlying value, actively manage properties and add value during the holding period, realize profits over the long term, and recycle capital into new opportunistic investments. This model has produced a notable 10-year tangible book value growth CAGR of 13.5%. Our knowledge and due diligence of Kennedy Wilson was aided significantly in partnership with Third Avenue's Real Estate team, who have owned the stock since early in 2015.

    At our average cost of just over $17 per share, we not only have significant upside to our NAV estimate of $25, but also what we consider to be a "free option" on performance fees and monetization of low basis (and now entitled) land acquired in conjunction with income-producing properties. The company appears poised to generate sizable NAV growth as it expands third-party AUM and harvests profits (including promotes) from a series of the well-timed investments it made over the past several years.

    From Chip Rewey's second quarter 2016 Third Avenue Small-Cap Value Fund letter.


  • Third Avenue Comments on Interface Inc.

    Interface, Inc. (NASDAQ:TILE) Interface has been on our radar for some time and during the quarter its stock price reached a level we viewed as an attractive entry point, having declined more than 40% within the past few quarters due to investor concern around the company's level of growth. While we agree that growth in the short-term is likely to be muted, we believe the company's core product - modular carpet - is poised for long-term secular growth.

    Interface is the world's leading manufacturer of carpet tile. The strength of its brand and its reputation for service, quality, design and performance provide a competitive advantage. Interface's global manufacturing capabilities across four continents also provide an advantage in serving multinational corporate customers quickly and cost-effectively.

    Central to our thesis on Interface is the fact that carpet tile has reached the point where it is cost-competitive with traditional 'broadloom' carpet but offers numerous advantages, including efficiency in installation and replacement. In addition, the company is well-financed and well-managed, with a long-tenured management team.

    Having made our investment in the company at an undemanding valuation of 13-14x free cash flow and a substantial discount to our estimate of NAV,we believe the market is likely to assign Interface a higher valuation over time as commercial construction levels continue to improve and Interface continues its expansion overseas and into newer verticals such as education. Moreover, we would not be surprised to see Interface become an acquisition target itself if its current depressed valuation in the public markets persists.

    From Chip Rewey's second quarter 2016 Third Avenue Small-Cap Value Fund letter.


  • Third Avenue Comments on Carrizo Oil & Gas

    Carrizo Oil & Gas, Inc. (NASDAQ:CRZO) Since our initial purchase in February, Carrizo Oil & Gas has been a strong performer. With a solid balance sheet and a significant drilling inventory,we see Carrizo as a multi-year compounder into recovering oil prices, however long that takes.

    Based in Houston, TX, Carrizo is an exploration and production company focused on oil and gas plays in the U.S. Its most important acreage is in the high quality core areas of the Eagle Ford shale in South Texas, the Delaware basin in the Permian in West Texas, and the Utica shale in Ohio. Carrizo's share price, like those of all oil and gas production companies, came under extreme price pressure in February, as the market sold off and investors feared sustained oil prices in the low-$20 per barrel range.

    Carrizo is unique from our perspective as a small cap company thanks to its high quality acreage (what we call good rocks) and a strong balance sheet. It fits our criteria for creditworthiness, with a disciplined hedging program to forward sell 50% of production, and a recently re-determined borrowing base on its $600 million revolving loan versus $50 million drawn.

    As for its acreage, Carrizo rocks aren't just good, their 88,000 acres in the Eagle Ford play in South Texas are great, with about 75% oil cuts and a PV103 break-even of $32.50 per barrel. Further, Carrizo has the ability to respond quickly to higher prices, with drilled but uncompleted inventory of 53 net Eagle Ford wells, which represents upwards of almost 12,000 barrels of oil equivalent production per day (B0Epd), or almost half of their current production run rate. With stronger prices, Carrizo has the balance sheet and the acreage to opportunistically increase production in 30 days through fracking and completing these wells. Moreover, it has a long horizon of drilling visibility with 53 planned Eagle Ford wells in 2016, vs. a base well inventory of 915 drilling locations and potentially an inventory of 2,100 locations with tighter spacing. Indeed, as good oil plays get better,

    Carrizo has the sweet spot acreage in one of the best.

    From Chip Rewey's second quarter 2016 Third Avenue Small-Cap Value Fund letter.


  • Third Avenue Comments on Cambrex Corp

    Cambrex Corp. (NYSE:CBM) We took advantage of the February sell off in the market to acquire shares of Cambrex at around $38 per share, an attractive discount to our estimate of NAV. We see the combination of a strong balance sheet and a healthy revenue outlook as supportive for book value growth to continue, given the dynamics of Cambrex's business.

    Cambrex is a well-financed specialty chemical company focused on life sciences; it develops and commercializes active pharmaceutical ingredients (APIs). Cambrex also produces Generic APIs, Controlled Substance APIs and is expanding into finished-dosage generic API manufacturing. Cambrex's API business is unique in that it manufactures the active ingredient in several leading pharmaceuticals and serves as a supplier to various drug companies. As such, it generates revenues from volumes sold and not price per finished pill. Cambrex's customers focus not only on product purity but also on quality, consistency and documentation of the manufacturing process ascompetitive attributes.

    Several long-term drivers support revenue growth for Cambrex.


  • Chip Rewey's Third Avenue Small-Cap Value Fund 2nd Quarter Commentary

    Dear Fellow Shareholders:

    We are pleased to provide you with the report of the Third Avenue Small-Cap Value Fund (the "Fund") for the quarter ended April 30, 2016.


  • Martin Whitman's Third Avenue Funds 2nd Quarter Shareholder Letter

    Dear Fellow Shareholders:

    One conservative, but highly productive, approach to long-term common stock investing is to acquire issues which have the following characteristics:


  • Energy Company Enters RSA; Gurus Buy the Stock Anyway

    Offshore drilling company Hercules Offshore Inc. (HERO) has entered into a restructuring support aggrement (RSA) with its lenders as a first step of the bankruptcy protection process. According to the company's press release, Hercules Offshore will make various restructuring reforms under it's RSA, including: soliciting and filing Chapter 11 petitions to its first-lien lenders, providing shareholder recoveries, and transfering unsold assets into wind-down vehicles.

    Incorporated in Delaware July 2004, Hercules Offshore serves natural gas companies through shallow-water drilling. A major oil and gas company, Hercules Offshore provides services ranging from oil and gas exploration, development drilling and other services tailored to shallow-water provinces.


  • Third Avenue Management Q2 2016 International Value Letter

    Fund Performance

    Our previous Third Avenue International Value Fund letter described our inability to predict the timing of favorable performance, which we expected to result from the appreciation of our deeply out of favor positions. We are pleased to report some small measure of reconciliation of price to value has occurred producing strong performance during the quarter. For the three months ending April 30th 2016, the Fund returned 20.21%¹ as compared to MSCI AC World ex US Index, which returned 9.91%. We use the expression “small measure” here to emphasize our view that, recent performance notwithstanding, our positions have not remotely been reconciled to their respective long-term values and that, in aggregate, the portfolio’s undervaluation has barely been dented. Positive performance this year has in large part been driven by our holdings that performed most poorly in 2015 and were among the most out of favor sectors globally until roughly mid-February of this year. For the year to date period through April 30th, four of our top ten performance contributions came from companies with a majority of their businesses located in Latin America while two of our top ten contributors were copper mining companies. The Fund also benefited from the appreciation of two European industrial companies as well as from our holding in Weyerhaeuser (NYSE:WY), which we added to materially in February as the stock declined, we believe for technical reasons related to its merger with Plum Creek. Following the February closing of that merger the stock appreciated strongly.


  • Third Avenue Management Comments on Weyerhaeuser

    An example of one of our portfolio holdings which has, and continues to have, opportunities for self-help is Weyerhaeuser (NYSE:WY). Weyerhaeuser is one of the Fund’s largest holdings and, as stated above, was our most significant contributor to performance, with a total return of 26.8%, during the quarter. We added to the position during the quarter on weakness. We believe the company remains attractively priced given its high-quality assets and additional opportunities for longer-term growth.

    Weyerhaeuser is a well-capitalized U.S.-based forest products company with timberland holdings, wood products used in homebuilding, and cellulose fibers used in absorbency products such as paper towels. The company had been negatively impacted by macro-related headwinds from a decline in demand from China and continued weak U.S. housing markets. CEO Doyle Simons, hired in 2013, responded with numerous measures. The company streamlined its operations by selling off its homebuilding business, bolstered its timberlands portfolio with the acquisition of Longview Timber, enacted cost cutting measures throughout the company, and initiated a significant, $1.5 billion share buyback program, which at the time accounted for nearly 10% of shares outstanding. During the quarter, the company completed its merger with Plum Creek Timber Company in a stock-for-stock transaction. Management estimates at least $100 million of annual savings from cost synergies. The merger increases Weyerhaeuser’s exposure to the U.S. South, a region which should benefit when the residential market recovers. In addition, Plum Creek brings with it a team that historically had been able to unlock higher-and-better-use values from its timberlands; we believe that additional opportunities to do so lie in Weyerhaeuser’s timberlands portfolio. Also, post-quarter end, Weyerhaeuser announced an agreement to sell its cellulose fibers pulp mills for $2.2 billion in cash. They plan on using a substantial portion of the after-tax proceeds from the sale to pay down debt.


  • Third Avenue Management Comments on Johnson Controls

    Johnson Controls, Inc. (NYSE:JCI) As mentioned above, we used the market volatility in the quarter to establish a new position in Johnson Controls (NYSE:JCI) common stock. We are impressed with management and with the opportunities for growth as the company focuses attention on its core businesses in building systems products and services and power solutions. During the quarter, the company continued to make progress with its plans to spin-off its automotive business (seating and interiors) and announced a merger with Tyco, a leader in commercial fire and security solutions, which is complementary to JCI’s operations in HVAC and building automation systems. The building products and services business has tailwinds driven by improvements in non-residential construction as well as opportunities for growth as JCI increases its presence in the residential market. As the global leader in non-residential HVAC and industrial refrigeration, JCI benefits from a 90%+ renewal rate once a relationship with a building has been established. The merger with Tyco will add fire and security solutions to the overall offering. Over the longer-term, demand for signifcant energy savings should drive adoption of “smart buildings” that can automatically adjust and monitor the temperature, security and lighting of a building. JCI also recently established a joint venture with Hitachi, which is one of the largest players in variable refrigerant flow (VRF) technology and has a strong presence in Asia, including China. The joint venture also provides JCI additional opportunity to expand its residential exposure in North America. Through its Power Systems segment, JCI is the leader in automotive batteries, largely for the aftermarket. Aftermarket battery sales have attractive recurring revenue characteristics as they are not discretionary items – when your car’s battery dies, unless you want to be stranded, you typically have it replaced as soon as possible! The power systems segment is also benefiting from environmental regulations to reduce CO2 emissions, which is driving adoption of start-stop technology. Start-stop vehicles automatically shut off when the vehicle is idling, then restart when the driver releases the brake pedal. The battery is used to restart the engine after every stopping event. JCI could see other operational improvements as well. Assuming the merger with Tyco is completed as planned, the companies expect around $1 billion of productivty and deal synergies over the next three years. JCI also has potential for further resource conversion as the remaining industrial businesses are separable and saleable. The fundamentals of building systems solutions and batteries are solid and driven by demands for energy efficiency. As the company moves to transform itself into a multi-line industrial company, one result could be a higher market value simply as a result of being reclassified into the multi-line industrial sector. Because of its historical exposure in automotive, JCI is often considered – and valued – as an automotive supplier. Auto suppliers are valued lower than industrials because of their attendant lower margins compared to industrial companies. Having said that, the automotive business, recently renamed Adient, has value. It is the market leading provider of automotive seating in North America, Europe and China, with longstanding relationships with all of the major global Original Equipment Manufacturers. The business also has an equity joint venture with Yanfeng Automotive in China for interior trim systems such as door panels, instrument panels and consoles. Once the automotive seating business is spun off, there is the potential for a beneficial re-rating of JCI to the multi-industrial sector. We have seen companies that undergo a sizeable transformation, whether a spin-off or sale of a substantial part of their business, fall into an investment “purgatory” where they no longer fall into a clear industry and therefore are no longer part of the sector weighting or covered by the same analysts. This is the situation that Visteon, which we discuss in the Small Cap letter, found itself–misunderstood by the market as a statistically expensive auto parts company yet was transforming its business into a standalone automotive electronics company with solid growth prospects and a cash-rich balance sheet. In summary, we find much to like about JCI and look forward to positive results from its addition to the portfolio.


  • Third Avenue Management Comments on Apache

    Apache (NYSE:APA) surprised many investors by reporting decent quarterly earnings. Most importantly, additional funding was not needed given its solid financial position. As most energy peers are battling stressed balance sheets, we were pleased (but not surprised) Apache avoided raising capital at a disadvantageous time.


  • Third Avenue Management Comments on Comerica

    Comerica (NYSE:CMA) also benefitted from company-specific factors. Shareholder activists are leaning on Comerica management to boost returns or sell to a larger peer. We have always believed that one of the core contributors over the long-term is not just business fundamentals, but also a dedicated and open management team that pursues opportunities that can accelerate the creation of shareholder value. Comerica management took control of the situation and announced that it hired Boston Consulting Group in April to advise on strategic intiatives. We are eager to hear the recommendations and we are encouraged that management is open to a wide variety of options.


  • Third Avenue Management Q2 2016 Value Fund Letter

    During the fiscal second quarter, oil prices rallied, credit markets improved and stock prices rebounded as macro fears were replaced by optimism. That trend followed a period when oil prices fell, credit markets deteriorated and stock prices sagged. And that followed a period when…well, you get the idea. There’s been no shortage of market volatility.

    Some may delight in trying to ride this bucking bronco of a market. But we have never been momentum jockeys. We are value investors, which means we care deeply about company fundamentals. We look for companies with strong management that can deliver long-term shareholder value regardless of macro trends or market movements. We buy securities of quality companies at attractive prices. We hold onto them. For a long time. And we don’t pay much attention to what markets may do in the interim, as long as our investment thesis remains intact.


  • Dutch Online Broker Binckbank Faces Substantial Headwinds

    Binckbank (BINCK) is a Dutch-based online broker and bank. The stock has had an excellent dividend payout over the last few years but has faced headwinds with negative interest rates, roboadvisors and volatile equity markets.

    The company has 71 million shares and trades at a market cap of €385 million ($428 million). It takes $1.11 to buy one euro. Earnings per share were €0.79 in 2015, and the stock trades at a trailing price-to-earnings ratio of 6.87. The dividend was €0.39, and the dividend yield was 7.1%.


  • First Eagle Investment Boosts Stake in American Express

    First Eagle Investment (Trades, Portfolio) is an independent firm with approximately $94 billion in assets under management. During the first quarter the fund bought shares in many stocks:

    The fund increased its stake in Weyerhaeuser Co. (WY) by136.62% with an impact of 1.64% on the portfolio.


  • 3 Stocks Warren Buffett Should Buy

    Chip Rewey, portfolio manager of Third Avenue's flagship Value Fund and Small-Cap Fund, laid out three stock ideas that he said Warren Buffett (Trades, Portfolio) should be interested in, while speaking at GuruFocus' Value Conference Friday.

    The first is Comerica (NYSE:CMA), a bank headquartered in Texas and currently trading at 18x earnings. Rewey said Comerica has strong credit worthiness, one of the most important attributes for any bank. Comerica had an outstanding underwriting record, even during the financial crisis of 2007 and 2008. Investor fears of the volatility of the energy book has pushed the price down, creating more opportunity to invest. The bank traded down slightly over the past year by 5%.


  • Third Avenue Buys Ralph Lauren, Boosts Baxalta

    Martin Whitman (Trades, Portfolio) is founder and former portfolio manager of the Third Avenue Value Fund. Chip Rewey now manages the fund after Whitman stepped down from active management duties. During the first quarter of the year, the fund bought many stocks and the following are the most heavily weighted.

    Third Avenue acquired 229,973 shares in Harman International Industries Inc. (HAR) with an impact of 1.45% on the portfolio.


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