Third Avenue Management is an investment management firm launched in 1990 by veteran value investor Martin J. Whitman. Whitman is considered to be a “career investment banker and turnaround specialist” with an educational background hailing from Syracuse University. Furthermore, Whitman holds a master degree in economics, is a recipient of the coveted CFA designation, and author of The Aggressive Conservative Investor, Value Investing: A Balanced Approach, and Distressed Investing: Principles and Technique. Symbolically represented by a New York Elevated Train logo, it serves as homage to the value philosophy of the firm as the El train historically cost a dime to travel from borough to borough in New York City. Third Avenue offers several different products to investors, from the classical value fund, to more exotic funds such as focused credit funds. Nonetheless, the flagship and originating fund of the firm is the Third Avenue Value Fund (TVFVX).
The stated objective of the fund is simply that to seek “long-term capital appreciation”. To execute this objective, the firm believes in a disciplined fundamental approach with the utilization of a focused approach on balance sheet analysis. Key criteria sought after by the firm are as follows:
A. Strong Finances – Companies that have strong balance sheets and leveraged appropriately for its industry and size.
B. Strong Leadership –Companies with strong leadership that have their interests in line with shareholders.
C. Simple Business Model – Companies that have easy to understand operations with accessible information for the conduct of due diligence.
D. Politically / Legally Insulation – Companies that act accordingly to protect both the business and shareholders rights.
In addition to the aforementioned criteria, Whitman, like most value investors, look for a significant margin of safety in his investments with potential to grow over a 5 year horizon. Due diligence is conducted via all SEC filings, outside consultants, numerous interviews with management and focused analysis of the balance sheet. Third Avenue Management feels the balance sheet analysis is the best measure of value because they believe that projected earnings and financial statements “do not capture the possible impact of corporate events such as mergers and acquisitions…share repurchases…asset sales…corporate liquidations”. Nonetheless, the firm will trim investments if they are to become over weighted or overvalued, significant operation changes occurs, or a flaw in the original due diligence is discovered.
Looking forward in the firm’s third quarter report, Whitman decided to address the solvency issue of the United States for his economic outlook. Generally speaking, the firm believes that the US is an excellent place for long-term investment due to numerous reasons, with key points as follows:
A. General lack of corruption
B. Reliable rule of law
C. Motivated managers at the helm of companies
D. Well developed securities market
E. Political stability
Whitman believes that although the political topic of the day was the amount of debt owed by the federal government, it overshadowed two important factors: terms of debt and productivity of debt. It is of Whitman’s opinion that the aggregate debt is never paid off, but rather maturing instruments, so the government should continue to utilize debt as a means to finance productivity. He argued that large corporations cannot be hailed as model of efficiencies, given all that have occurred, but criticism is also warranted for the federal government. However, Whitman believes that in terms of overall track record, the government should not be considered lesser, but as a “partner” in the future. Whitman acknowledges that while a great deal of his firm’s portfolio is currently invested overseas, he would prefer to invest in the US due to overall stability if all opportunities and growth potential were equal.
Of all the funds at Third Avenue Management, the value fund will be utilized as the basis of comparison due to its characteristics and profile. Since the firm’s and fund’s inception in 1990 to March of 2011, the fund has returned 13.73% annually, while the benchmark S&P 500 returned 9.20%. This marks an outperformance metric of 4.53% over this time period. Recent performance however, has been mixed. In 2008, the firm posted a negative loss of 45.60%, followed by a 44.51% return in 2009. Comparatively speaking, the benchmarked lost 37% in 2008, and gained 26.5% in 2009. In 2010, the firm underperformed the benchmark by 1.2% with a return of 13.9% for the year. Currently, the fund is trending a loss of 10.10% for the year.
The following charts and tables demonstrate the sector breakdown and top holdings of the firm as of Q2 of 2011 as per the 13F filings. The firm currently manages, on an aggregate basis, $4.9 billion in 104 equities throughout all of their funds. In terms of the three largest sector holdings, 34.50% of all equities are invested into financials, followed by 18% into basic materials, and 11.50% in oil & gas holdings. Most of the rebalancing changes were minor in nature, with the biggest change seen in a decline in oil & gas holdings by 4.50%. In terms of the top 5 holdings, they constitute 33.89% of all equities held by the firm. POSCO was the only equity of the top five holdings to see an increase in shares held, although minor, while the other four holdings saw larger declines in shares held.
POSCO ADS (PKX)
POSCO is a Korean steel company offering a range of products from stainless steel to titanium products used in ships. POSCO shares currently trade at $77.93, with a market capitalization of $27.18 billion. PKX is the largest holding of the firm, at 9.67% of all equities held, with an average acquisition cost of $103.67, which furnishes a capital loss of 24.82%. From quarter to quarter, Third Avenue increased their holdings of PKX slightly by .12%.
PKX has a P/E ratio of 7.11, a P/B ratio of .86, and a P/S ratio of .58. POSCO reported revenues of $54 billion for the year of 2010, with a net income of $3.8 billion, tendering a margin of approximately 7%. Earnings per share totaled in at $11.35, with a dividend yield paying out at 2.90%. Over the last 10 years, the firm has grown revenues and earnings annually by average rates of 18.2% and 18.3% respectively.
PKX recently acquired a total controlling interest of 75% in Thainox, a steel producer in Thailand. Currently, POSCO is attempting to become one of the first international steelmaker to expand to India. On the same note in terms of international expansion, POSCO plans on expanding to Mongolia with a coal-gasification plant in 2012.
GuruFocus rated PKX with the business predictability rank of 1 star.
Brookfield Asset Management (BAM)
Brookfield Asset Management specializes in the management of property, power, and infrastructure assets. Their shares trade at approximately $26.57, with a market capitalization of $16.52 billion. The average cost of each share of BAM in the portfolio is estimated at $21.69, which renders a capital gain of approximately 22.4% from its current trading price. Brookfield Asset Management is the 2nd largest holding of the portfolio, at 8.44% of all equities held, but saw a reduction of 9.41% of shares held from quarter to quarter.
BAM has a P/E ratio of 7.20, a P/B ratio of 1.21, and a P/S ratio of 2.44. Revenues approximated $13.62 billion, with a net income reported at $3.19 billion, yielding a profit margin of 23.4%. For the fiscal year of 2010, Brookfield Asset Management reported earnings of $3.69 per share, with a dividend yield of 1.96%. On average, BAM has grown its revenues and earnings by annual rates of 16% and 29.3% respectively, over the last 10 years.
BAM is currently in the midst of attempting to reorganize the firm by consolidating several divisions into one of the world’s “largest pure-play renewable power platforms” according to chief executive Richard Legault. In other news, Brookfield Assets, in competition with several other firms such as the Blackstone Group, is bidding for Archstone, an apartment management company.
GuruFocus rated BAM with the business predictability rank of 1 star.
Forest City Enterprises (FCE.A)
Forest City Enterprises is a commercial and residential real estate developer, manager, and owner operating in 27 states. Their shares closed at $11.12 with a market capitalization of $1.90 billion. FCE.A was acquired at an estimated price of $6.92, yielding a capital gain of approximately 60.6%. Forest City Enterprises is the third largest holding of the portfolio, currently comprising 7.34% of all equities held. From quarter to quarter, Whitman reduced his holdings of FCE.A by .62%.
FCE.A has a P/E ratio of 30.05, a P/B ratio of 1.48 and a P/S ratio of 1.70. For the fiscal year ending in 1/2011, the company reported earnings of $.37 per share. Revenues of $1.1 billion were received, with a net income at $58 million, yielding a margin of 5%. Over the last 10 years, FCE.A has grown its free cash flow by 11.6% on an average basis.
Forest City recently sold 2 industrial properties in Virginia to McFarlane Partners for the sum of $2 million. In other news, a subsidiary of Forest City Enterprise has in conjunction with Facecake Marketing Technologies, launched a new technology that allows shoppers to see themselves on a screen, and interchange accessories and clothing onto themselves in three of their California regional malls.
GuruFocus rated FCE.A with the business predictability rank of 1 star.
Bank of New York Mellon (BK)
The Bank of New York Mellon is a financial services company offering a variety of services from asset management to traditional consumer operation. BNY closed at $18.52 with a market capitalization of $22.83 billion. Shares of BK were accumulated at $27.51 which yields a capital loss of approximately 32.7%.Between Q1 and Q2 of 2011, holdings of BK were reduced by 1.02%.
BK has a P/E ratio of 8.58, a P/S ratio of 1.70, and a P/B ratio of 0.73. Earnings for the year were repotted at $2.16 per share, with a dividend yield of 2.81% currently. Revenues topped $14.4 billion, with a net income of $2.5 billion, yielding a margin of 17.36%. Revenues and book value, has on average, grown at annual rates of 2% and 14.3% respectively, over the last 10 years.
CEO Gerald Hassell of BNY said that of right now, BNY “has the right strategy…a great biz model”. This is sharp contrast to the departure of former CEO Robert Kelly, who stepped down earlier this month due to a difference in strategic outlook with the board of directors. In other developments, Detroit’s pension funds are suing BNY in a $1 billion class action lawsuit over a perceived conflict of interest regarding investments in Lehman Brothers.
GuruFocus rated BK with the business predictability rank of 1 star.
Tejon Ranch (TRC)
Tejon Ranch is a real estate developing company operating through three operating segments: resort/residential, commercial / industrial and farming. Shares of Tejon closed at $24.77 with a market capitalization of $494.61 million. Third Avenue paid an average price of $26.51 per share of TRC, yielding a capital loss of approximately 6.5%. From quarter to quarter, the firm reduced their holdings of TRC by 2.51%.
TRC has a P/E ratio of 33.22, a P/B ratio of 2.02, and a P/S ratio of 13.61. Tejon Ranch reported earnings of $0.75 for the year, with revenues approximating $35.5 million. The bottom line income was $3.96 million, rendering a profit margin of 11.15%. Over the last 10 years, TRC has grown its revenues and free cash flow by 4.7% and 12.2% annually.
GuruFocus rated TRC with the business predictability rank of 1 star.
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