Followers of the Fund will remember that a small position in Rofin-Sinar Common (RSTI) was initiated during the April quarter2. That position became much more meaningful in the July quarter. Additional shares of Rofin-Sinar were purchased as the discount to our estimate of net asset value widened and became more attractive amidst broader macro and near-term earnings concerns. In our April letter, we noted simply that Rofin-Sinar is an "industrial capital equipment company." In plain English, the company makes lasers and parts for lasers – lasers for cutting, lasers for welding, lasers for marking materials and lasers for medical equipment.
With one of its two headquarters in Germany3, cyclical end markets, more than 40% of sales from Europe and a third from Asia, there is plenty to dislike in the near-term for topdown investors as macro concerns and uncertainty swirl. In a bottom-up analysis, however, there is much more to like for investors with a time horizon beyond a year or two:
• the balance sheet is rock-solid with about 19% of the company's market cap as net cash and a history of generating excess cash;
• the company has been profitable every year since listing publicly in 1996;
• management has an impressive track record of compounding revenue and earnings at double digit rates over the past 10+ years;
• a service and parts business provides a base of highermargin recurring revenue;
• shares trade at only a slight premium to book value, while returns on equity have averaged 10%+ as a public company;
• application expertise and a global support network provide differentiation for products operating in demanding manufacturing environments;
• prospects for attractive longer-term business growth are reasonable, as lasers take share from more traditional means of cutting, welding and marking materials; and
• the current market valuation appears to offer limited downside over a reasonable timeframe, yet represents a meaningful discount to precedent transactions in a consolidating market.
In sum, Rofin-Sinar has been a very well managed business with an expanding, albeit cyclical, market opportunity. If past is prologue, management is likely to continue compounding value for shareholders at attractive rates, even as a given quarter or year may fall short of the earnings capacity and longer-term business potential.
From Third Avenue's third-quarter letter, by Curtis R. Jensen, chief investment officer and portfolio manager of Third Avenue Small-Cap Value Fund.