Harman International (HAR, Financial) is a leading provider of premium branded audio systems, consumer electronics and related technologies found in automobiles, homes and professional venues. Founded in the 1940s by Dr. Sydney Harman4, the company's rich history has produced not only a legacy of highly-regarded and familiar brands such as Becker, Harman/Kardon, JBL, Infinity, Lexicon and Mark Levinson, but also more than 4,000 patents. By 2007, those brands and an enviable growth record attracted the attention of private equity sponsors KKR and Goldman Sachs who proposed and subsequently walked away from a highly-levered transaction that valued the company at $8 billion. The company's growth driver within the auto segment had temporarily fizzled, challenged by cheaper alternatives. The onset of the financial crisis forced the company's newish CEO, Dinesh Paliwal, to cut costs and adopt a more competitive business model. We first looked at Harman Common in 2009 in the aftermath of the failed buyout and have tracked the company's development since. Today, Harman continues to benefit from management's restructuring efforts, including a revamped and somewhat revolutionary and controversial approach to R&D.5 If the company's recently awarded auto business, which today totals more than $16 billion, is any indication, it appears management has struck a pleasing chord with a customer base that is notoriously risk averse and difficult to please. The company's infotainment systems are not only found in the world's most luxurious automobiles such as Ferrari, BMW and Mercedes, but also in those of developing OEMs such as Geely of China and Tata of India. Harman's automobile infotainment systems appear to sit in the sweet spot of increasing demand for both connectivity and safety. We expect that, along with a growing top line, the company's current order book will generate improving margins at the same time that management aggressively manages its cost structure. Based on the Fund's cost basis, which equates to roughly six times 2012 EBITDA, we believe we have identified a "growth" stock trading at a significant discount to intrinsic value.
From Third Avenue's third-quarter letter, by Curtis R. Jensen, chief investment officer and portfolio manager of Third Avenue Small-Cap Value Fund.
From Third Avenue's third-quarter letter, by Curtis R. Jensen, chief investment officer and portfolio manager of Third Avenue Small-Cap Value Fund.
