Third Avenue Management

Third Avenue Management

Last Update: 04-07-2017
Related: Martin Whitman

Number of Stocks: 114
Number of New Stocks: 8

Total Value: $2,207 Mil
Q/Q Turnover: 9%

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

Third Avenue Management Watch

  • Third Avenue Management Comments on Avnet

    Avnet (NYSE:AVT) is a leading electronic components distributor. It distributes semiconductors, passive and electromechanical devices and embedded products, acting as an intermediary between components suppliers and end customers. Its services help customers evaluate, design-in and procure electronic components throughout the lifecycle of a customer's product, thereby enabling faster time to market as well as cost efficiencies in both the design and manufacturing processes for its customers. Continued innovation and increasing electronics in all types of industries (industrial, automotive, consumer, etc.) should spur demand for Avnet's services over the longer term.


    What intrigued us about Avnet recently is that the company is in the process of transforming itself to focus on higher value-add and higher margin design and supply chain services. As part of that effort, it sold its lower-margin technology solutions business and acquired a U.K. company, Premier Farnell, to broaden its customer reach and provide it an earlier entrée in the design cycle. Products go through various phases in their life cycle: idea generation to design to production. By getting involved earlier in the design process, Avnet can take a larger role, providing it an opportunity for servicing greater volumes, particularly if and when the product goes into mass production. Avnet received approximately $2.6 billion from the sale of its technology solutions business, of which it plans to use around $1.5 billion to pay down debt. Thus, Avnet's pro forma balance sheet as of year end 2016 was in a net cash position. It also recently increased its share buyback program by $500 million. The Company is cash generative and has opportunities for margin improvement both from revenue and cost synergies related to Premier Farnell as well as other ongoing cost reduction improvements and the completion of an enterprise resource planning (ERP) implementation. We were able to purchase shares of Avnet common stock at an attractive valuation of approximately 1.05x pro forma book value and a discount to estimated NAV.

      


  • Third Avenue Management Comments on EOG Resources

    We initiated a position in EOG Resources (NYSE:EOG), a $56 billion independent Energy and Production company with a North American focus on oil shale drilling. EOG is a high quality compounder and has industry leading acreage positions in the most prolific, lowest cost and geographically desirable basins--the Permian, the Eagle Ford and the Sanish/Parshall in the Bakken. As a leader in shale drilling, EOG has foreseen the problems facing the industry in fracking sand availability (it owns its own sand company) and take-away and processing (the Company is invested in core areas and is a leader in oil by rail, which today is a call option on tight markets). EOG has low cost acreage as it has grown organically, with the exception of the Yates acquisition in 2016, where it paid "for the best" and accumulated core acreage in the Delaware Permian at a time of distress in the industry. This deal should pay off for EOG as it develops deeper zones, which is in line with our thesis that "big fields get bigger". Additionally, EOG's timing on the deal looks prescient, near the end of recent oil price declines and just ahead of OPEC cutbacks.


    EOG has a highly visible path to continue its strong book value growth. EOG is only allocating drilling capital to wells that produce at least a 30% return at $40 per barrel for oil, where it has 10+ years of drilling inventory, a figure that is likely to grow with further delineation of its acreage and continued drilling efficiencies. While every E&P company will be subject to oil price volatility, we feel EOG is best positioned to add value in the strong times and survive the lean times as it has a strong balance sheet and industry leading returns.

      


  • Third Avenue Management Comments on Bank of New York Mellon

    Our investment premise for Bank of New York Mellon (NYSE:BK) is that it is a strong book value compounder that is substantially "under-earning" its profitability potential. The Company has undertaken significant cost savings initiatives, which combined with market-leading digital platform investments, should drive future growth and market share gains. The Company's balance sheet is strong with significant excess capital enabling a sizable return of capital to shareholders through both dividend and share buybacks. Lastly, with activist interest still high, any loss of momentum could lead to renewed calls for a break-up of the company to accelerate closure of the discount to NAV.


    BK's book value and tangible book value growth both inflected positively in 2016 over its three-year trailing averages, over and above strong buyback and dividend activity, and we see this growth as set to accelerate with stronger earnings. Earnings Per Share (EPS) growth finally reaccelerated in 2015 and 2016, to $2.85 and $3.17, respectively, after languishing in the low-$2 per share range from 2011 to 2014. Management, spurred by activist pressure and new board members in 2014, has accelerated its cost reduction efforts and has committed to positive operating leverage regardless of the revenue growth environment. The results of this focus are clearly seen in 4Q 2016 earnings where non-interest expenses fell 2.1% while revenues grew 1.7%, generating 351 basis points of positive operating leverage. This cost-cutting focus is a key tenant of our investment case and an underlying pillar of why we believe BK shares can outperform regardless of the broader market environment. Further, while this cost reduction focus was started in 2014 when falling interest rates and meager corporate activity were suppressing revenues, we think the current tailwinds of higher interest rates and better corporate activity should also accelerate revenue growth, providing even stronger earnings leverage over the next few years that could push 2018 EPS to the $4.00 per share level.

      


  • Brookdale Worth More on Sale

    Brookdale (NYSE:BKD) is the country’s largest operator of facilities for senior citizens. The company has faced quite a few problems over the years and has not been profitable. The stock does not pay a dividend and has copious amounts of debt. The plus is that the real estate is probably worth more, and the company could get sold.


    The company has 185.65 million shares, the stock trades for $12.85, and the market cap is $2.385 billion. Diluted earnings per share are a loss of $2.18. The stock has not paid a dividend since 2008.

      


  • Third Avenue Management's Top 5 Stock Buys of Q4

    The firm founded by legendary investor Martin Whitman (Trades, Portfolio), Third Avenue Management (Trades, Portfolio), selected eight new stocks and its flagship value fund beat the market in the fourth quarter.

    The Third Avenue Value Fund returned 4.72% in the fourth quarter, outperforming the 3.83% rise in the S&P 500 index. For the year, it returned 13.39%, also surpassing the 11.96% rise in the index. Leading its gains was the advance of its parcel of banks that it has accumulated over the past several years. As managers who focus on buying stocks low and holding for the long term, almost all of the financials they picked have risen substantially in price, and they see more appreciation to come.  


  • These 5 Funds Let Your Money Travel the World

    It’s a big world out there. We hear a lot of talk about the “global economy,” but the truth is much more complicated. It’s more accurate to say that the world is built on a collection of national and regional economies, each with its own unique attributes and near-term outlooks.


    Unfortunately, American investors all too often ignore the rest of the world or pay attention to what’s happening overseas only insofar as it affects their U.S.-based securities holdings. In doing so, they miss exciting growth opportunities and limit their portfolios’ diversification potential both of which are ever more critical in an increasingly complex and uncertain economic environment.

      


  • Third Avenue Management Comments on Lennar

    We initiated Lennar (NYSE:LEN) in October, and thus wrote up our comments in our prior shareholder letter, but due to the shift in our letter cadence, we are republishing our thoughts from our initial purchase.


    Marty Whitman said in October 1996: "Given Third Avenue's investment criteria, it is more accurate to view the situation as the industry selecting the Fund, rather than Third Avenue choosing the industries in which to invest' We think this quote superbly describes the opportunity the Value Fund saw in establishing a position in Lennar Corporation common in the quarter, as the shares sold off somewhat inexplicably from nearly $50 per share at their recent peak and allowed us to establish a position at just over $41.

      


  • Third Avenue Management Comments on Cerner

    Cerner (NASDAQ:CERN) is a leading health care information technology company. We have long admired Cerner as it is a well-financed compounder, having compounded book value at an average rate of 16% over the past 10 years. Delays in customer adoption of healthcare Information Technology (IT) systems as regulatory mandates have lengthened, exacerbated by concerns about potential changes to the ACA and the impact on healthcare IT spend, have negatively pressured Cerner's common stock price down from over $67 to our initial purchase cost of approximately $48, giving us an opportunity to acquire shares of Cerner common stock at an attractive valuation.


    Healthcare IT has been in the sweet spot of spending for hospitals as regulatory reform and increasingly complex regulatory requirements have driven a greater need for IT solutions. The ACA and Health Information Technology Economic and Clinical Health Act (HITECH) were established to transition the U.S. healthcare system from fee-for-service towards value-based outcomes, i.e., incentivizing hospitals and providers for increasing quality of care and patient outcomes rather than the volume of procedures performed. As part of this initiative, electronic health records systems were required and analytics and data collection to monitor outcomes is increasing. Cerner is one of the market leaders in these systems. Similar to other IT companies, services and software for the installed base of systems generates high-margin recurring revenue. Further, many legacy systems are in need of upgrades to enable them to meet the new regulatory requirements. Given its market leading position, Cerner has been gaining share and is well-positioned to continue to take share. In addition, there has been consolidation within the industry, including some vendors discontinuing products.

      


  • Calendar 4th Quarter Shareholder Letter From Marty Whitman's Third Avenue Value Fund

    Dear Fellow Shareholders:


      



  • Third Avenue Management Comments on Petroleum Geo-Services

    Petroleum Geo-Services ("PGS") (OSL:PGS) Throughout December and early January, PGS completed its refinancing activities as described in our previous letter. PGS conducted an equity raise primarily for the purpose of refinancing its 2018 bonds. The Fund was a holder of both PGS equity and its 2018 bonds. We were pleased to participate in improving PGS’ capital structure via the equity offering, which precipitated a meaningful price appreciation of both our equity and credit positions. PGS tendered for our 2018 bonds PGS on terms favorable to bondholders, and meanwhile the company’s equity responded very favorably to the improvement in the company’s capital structure and the elimination of its nearest debt maturity. Our investments in PGS securities have been important contributors to performance of late.

      


  • Third Avenue Management Comments on Lundin Mining

    Lundin Mining (“Lundin”) (TSX:LUN) In mid-November, Lundin announced that it had entered into an agreement to sell its holding in an entity called TF Holdings Ltd. TF is the entity through which Lundin and Freeport-McMoRan have for many years controlled a Central African copper mine called Tenke Fungurume. The Lundin transaction essentially is the sale of a 24% economic interest in the mine for the agreed price of CAD 1.14 billion. This transaction is expected to close during the first half of 2017 and would add considerable cash to what is already one of the mining industry’s best balance sheets. While Tenke Fungurume is an unusually high quality mine, its jurisdiction can at times be an unusually challenging place to do business. We view the transaction price as reasonable and look positively upon the prospective reduction of political risk embedded within Lundin. With the transaction proceeds Lundin would also bolster its position as one of the very few companies in a position to acquire mining assets at one of the rare times when some very decent assets may be available for sale.

      


  • Third Avenue Management Comments on Lundin Mining

    Lundin Mining (“Lundin”) (TSX:LUN) In mid-November, Lundin announced that it had entered into an agreement to sell its holding in an entity called TF Holdings Ltd. TF is the entity through which Lundin and Freeport-McMoRan have for many years controlled a Central African copper mine called Tenke Fungurume. The Lundin transaction essentially is the sale of a 24% economic interest in the mine for the agreed price of CAD 1.14 billion. This transaction is expected to close during the first half of 2017 and would add considerable cash to what is already one of the mining industry’s best balance sheets. While Tenke Fungurume is an unusually high quality mine, its jurisdiction can at times be an unusually challenging place to do business. We view the transaction price as reasonable and look positively upon the prospective reduction of political risk embedded within Lundin. With the transaction proceeds Lundin would also bolster its position as one of the very few companies in a position to acquire mining assets at one of the rare times when some very decent assets may be available for sale.


     

      


  • Third Avenue Management Comments on Global Logistic Properties

    Global Logistic Properties (“GLP”) (SGX:MC0) We have been satisfied owners of GLP for some time. From an execution standpoint, this logistics facility developer, owner and operator continues to do a fine job operationally. The company has judiciously grown its facilities network in China, Japan, Brazil and the U.S., both organically and through acquisition, at a pace appropriate for each respective geographic market while maintaining a conservative balance sheet. Meanwhile, the company has made great strides in growing its fund management platform, which has the benefit of improving overall returns through the incorporation of fee-paying third party capital. However, the stock had until recently languished at a low valuation presumably as a result of the broad perception that macroeconomic growth in China is slowing and that the growth of GLP’s network development will also slow in turn. Yet investors fixated on rapid growth of earnings fail to appreciate the value of the existing in-place network of facilities, a reasonable replacement cost analysis of those assets, the extreme difficulty in replicating the assets and the long-term secular drivers that are likely to make the assets increasingly critical and valuable over time. On the other hand, these concepts appear to be better appreciated by potential acquirers of GLP. In early November, it was widely rumored that a consortium of buyers had approached GLP with an interest in purchasing the company. One month later the company disclosed that it had opted to undertake a strategic review to identify means by which shareholder value could be enhanced. It was also disclosed that investment bankers had been hired for that purpose. We believe GLP’s assets and platform to be of exceptional quality and without rival in Asia. We suspect that GLP’s apparent willingness to entertain a transaction is likely to bring forth a number of potential buyers. In reaction to the above-mentioned rumors and press releases, shares of GLP appreciated by 24% in Singapore dollar terms during November and December.


     

      


  • Third Avenue Real Estate Value Fund 4th Quarter Commentary

    Dear Fellow Shareholders:


    We are pleased to provide you with the Third Avenue Real Estate Value Fund’s (the “Fund”) report for the quarter ended December 31, 2016. This quarter marks an abbreviated period as the Third Avenue Funds have elected to circulate our quarterly letters on a calendar year-end going forward (previously October 31) to more closely align with the reporting periods for a number of the Funds’ stakeholders. For the year ended December 31, 2016, the Fund returned +5.82% (net of fees)¹ versus +4.99% (before fees) for the Fund’s most relevant benchmark, the FTSE EPRA NAREIT Developed Index². While the Fund outperformed for the calendar year, Fund Management remains most focused on long-term performance where it has also exceeded the index, earning an +10.63% annualized return since its inception in 1998.

      


  • Third Avenue International Value Fund 4th Quarter Letter

    Dear Fellow Shareholders:

    With this investment letter, Third Avenue Management (Trades, Portfolio), including the Third Avenue International Value Fund, transitions to a calendar quarter shareholder letter schedule. We make this change in order to align more closely with interested financial intermediaries, many of whom have calendar quarter reporting requirements. It is our hope to better serve our fellow shareholders by making this transition. We have historically made these communications following the Funds’ fiscal quarters, the most recent of which concluded on October 31st. Therefore, this letter serves as an update for the two month “stub” period beginning November 1st and ending December 31st.  


  • Third Avenue Value Fund Buys 2 Stocks and Adds to 2 Positions in Q4

    Third Avenue Management (Trades, Portfolio), a private investment firm founded by legendary value manager Martin Whitman (Trades, Portfolio), ends its quarter on Oct. 31 and revealed the fourth-quarter trades of its Third Avenue Value Fund in its recent letter.

    The leader portfolio manager on the value fund is Chip Rewey. The firm’s philosophy focuses on fundamental, bottom-up research in a hunt for companies with strong capitalization, potential to compound value and shareholder-oriented management. They purchase when the companies trade at a discount to their net asset values.  


  • Third Avenue Focused Credit Fund Letter a Year After Starting Wind Down

    Dear Fellow Shareholders,


    As we wrote to you in our letter dated November 29, 2016, the Third Avenue Focused Credit Fund (the "Fund" or "FCF") recently paid its fourth liquidating distribution. Fund management has continued the orderly wind down of FCF and cumulative distributions now account for approximately 40% of the Fund's total assets since FCF announced its plan of liquidation on December 9, 2015.

      


  • Third Avenue Management Comments on Korn Ferry International

    Many of you may recognize the strong brand name of Korn Ferry International (NYSE:KFY), another purchase in the quarter, but you may not have noticed the business transformation the company has undertaken anchored by its December 2015 purchase of the Hay Group. Korn Ferry is best known for its executive recruiting. It is a top brand name in this highly fragmented industry, with a strong offering on the more resilient and niche C-suite space. Most of its job searches have annual compensation of $300,000 or more.


    With the acquisition of the Hay Group, Korn Ferry has leveraged this valuable network at the C-suite level and brought critical mass to its human resources advisory businesses. The goal is to engage more with its corporate clients beyond placing top level personnel and to provide a more stable revenue stream than a purely search-driven business model. When acquired, Hay Group earned an uninspiring 8% on its revenue, or $40 million in EBITDA. 11 months after the integration, the Hay Group has begun to deliver on its projected benefits and synergies. We estimate that Hay's EBITDA margin already improved from 8% to 12%, and should continue to grow to 15-16% over the next two years.

      


  • Third Avenue Management Comments on Comfort Systems USA

    Beyond a strong balance sheet, other key characteristics that we look for in our companies include a strong business model and a large addressable market to support long-term revenue and earnings compounding. Our addition of Comfort Systems USA (NYSE:FIX) is a good example of these factors. Comfort Systems offers design, installation, retrofit and service for HVAC and electrical systems for facilities such as office buildings, plants, retail centers, hospitals and universities. Comfort Systems is unique in that it focuses mostly in smaller cities where, relative to large urban settings, there is less competition for both projects and for skilled labor. The company works on approximately 4,000 jobs annually and most of the contracts are under $1 million. More than half of these are for renovations and repairs and are recurring in nature, rather than from new constructions.


    The outlook for revenue growth is solid, as the aging existing HVAC stock in the U.S. should provide a good organic growth rate of approximately 3 to 5% annually over many years. We particularly like the management team's skillset in acquiring smaller competitors to add geographic coverage and achieve operational synergies. Management buys small, local competitors that earn only 2 or 3% operating margins (the margins are low in this business because they include pass-through equipment costs) and pay only 5-6X EBITDA. After overlaying Comfort Systems' buying power and operational standards, margins of the acquired companies normally double to 4-6% after a year, effectively cutting the purchase price in half. We think that a combination of a solid core business, operational leverage and large acquisition opportunities will provide higher sales and higher margins for many years. Net of cash, the company has no debt. At our purchase price of just over $28, we see solid upside to our mid-$30's estimate of fair value NAV, with a solid outlook for book value growth and a 6.2% free cash flow yield.

      


  • Third Avenue Management Comments on Cubic Corp

    Cubic Corp (NYSE:CUB), another top holding for the Fund, is a small company with about $1.1 billion in market cap that has three main businesses: military communication equipment, military training (for example, they run the Top Gun flight school), and in our view the most interesting part is its transportation segment. The company's transportation segment is the world leader in design and management of public bus and subway systems, handling the fare systems for major cities such as London, New York City, Chicago, and Vancouver. Cubic is also leading technology efforts, such as smart phone payments and dynamic re-routing, to help keep us all on time for work.


    The company meets all of our requirements, with low (and declining) financial leverage, highly visible means to compound earnings and book value growth. And, at $43 per share, we think the stock is very under-valued, with upside to north of $60 within a couple of years.

      


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