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Valuation of Martin Whitman’s Four New Buys
Posted by: guruhl (IP Logged)
Date: July 10, 2012 06:07PM
Martin Whitman is in the process of handing the reigns over to his successor at $3.8 billion Third Avenue Management, Ian Lapey, who was promoted to sole portfolio manager on March 1, 2012. Whitman remains as chairman of the board of trustees and mentors the investor team. Year to date, the fund has returned 12.68%, recovering from its 11.68% downturn in the last year.
The investors in the third quarter bought four new stocks: Devon Energy (DVN), Comerica Inc. (CMA), Alleghany Corp. (Y) and White Mountains Insurance Group (WTM).
In his firm’s third-quarter letter, they reiterated that the firm emphasizes quantity and quality of a company’s resources when choosing stocks, namely, companies with a lot of cash and little to no debt. As long-term, buy-and-hold value investors, in their third quarter they bought conservatively valued holdings, primarily financials.
Third Avenue bought 518,149 shares of Devon Energy Corp. (DVN) in the second quarter at an average price of $63 per share. Devon Energy is an oil and gas exploration, development and production company with U.S. and international operations.
Devon ended the first quarter with $7.1 billion in cash, significantly higher than the $3 billion it had the year prior. It also has approximately $14.4 billion in long-term liabilities and debt, an increase from $9.6 billion the year prior, and has been increasing revenue each year since it met a cliff in 2009.
According to GuruFocus’ Valuations Tab, Devon Energy trades for a Graham Number of $61.15, slightly above its Tuesday share price of $55.24. Tangible book value is $39.3, intrinsic value according to the DCF calculator is $43.22, and it has a negative 0.04% rate of return and 13.8% earnings yield.
Devon began 2012 with a record-breaking quarter. The company averaged 694,000 oil-equivalent barrels (Boe) per day, the highest daily production rate in history in its North American onshore properties, and a 10% increase from the prior year. Its liquids production increased for the sixth consecutive quarter to 256,000 Boe per day, driven by a 26% increase in oil production.
Third Avenue purchased 490,000 shares of Comerica Inc. (CMA) at an average price of $31 in the first quarter. Comerica is a bank holding company with businesses that engage in corporate and consumer lending, mortgage loans, small business and individual banking, and mutual fund and annuity products.
Comerica currently trades for $30 per share, and by comparison has a Graham number of $45.61, tangible book of $35.40, intrinsic DCF value of $62.16, rate of return of negative 2.2% and earnings yield of 10.6%.
The firm commented on this holding in his third-quarter investor letter:
Third Avenue bought 39,898 shares of Alleghany Corp. (Y) at an average price of $333 in the first quarter. Alleghany Corp. is an insurance and financial services company.
Alleghany in the first quarter of 2012 had $1.1 billion in cash, significantly increased from the $311 million in had the year prior, due primarily to a merger. It has $1.9 billion in long-term liabilities and debt. The company has also produced strong cash flow annually for the last decade.
Alleghany is selling at a substantial discount to several of its valuation numbers. On Tuesday, it is trading for $341.68 per share, and has a Graham number of $667.49, tangible book value of $672.80, and intrinsic DCF value of $924. Its rate of return is 5.63, and earning yield is 24%, the highest of Whitman’s new purchases.
Alleghany just completed a merger with Transatlantic Holdings on March 6, so its first-quarter results include 25 days of operations with Transatlantic. As a result, in the first quarter, shareholders’ equity increased to approximately $6.2 billion, from $2.9 billion at year-end 2011.
The firm made these comments on Alleghany in his investor letter:
Third Avenue bought 21,628 shares of White Mountains Insurance Group (WTM) at an average price of $517.70 in the second quarter. White Mountains Insurance is a property, casualty insurance and reinsurance company based in Bermuda.
At the end of the first quarter, White Mountains had $1.5 billion in cash, flat from the previous year, and $1 billion in long-term liabilities and debt. For the last three years, revenue has been falling, though it has been improving for the last three quarters.
White Mountains is also inexpensive compared to several of its valuation numbers. Alleghany is trading for $522.63 per share, compared to a Graham number of $909.27, tangible book value of $650 and intrinsic DCF value of $341.48. White Mountains has a negative rate of return of 1.97% and earnings yield of 11%.
In the third-quarter letter, the firm commented on White Mountains:
For more of Martin Whitman’s third-quarter buys and sells, see his portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Martin Whitman.