â€œâ€¦ First the creditworthiness of the company issuing the equity; second, the ability of the issuer to grow net asset value ("NAV") (or its surrogate book value) over the intermediate to longer term; and, three, the price of the common stock relative to NAV.
To get a picture of how undervalued he expects his securities to be, he also noted that at July 31, 2013, the Dow Jones Industrial Index was trading at 3.0x book value and the S&P 500 at 2.5x book value. Yet the majority of securities in his Third Avenue portfolios traded in a range from 0.5x NAV and 1.0x NAV.
Today Whitmanâ€™s firm announced its third quarter portfolio update, which included three new stocks: Pargesa Holding SA (XSWX:PARG), Total SA (XPAR:FP) and 20% of a homebuilding and construction company â€” Cavco Industries Inc. (NASDAQ:CVCO).
Whitman added Cavco to his portfolio at a 4.2% position weighting, buying 1,809,108 shares when its share price averaged $54 in the second quarter. This accounts for 20.47% of shares outstanding.
Cavco is a $510.4 million market cap whose stock is up more than 25% over the past 12 months, close to a 10-year high. It is a builder of manufactured homes, modular homes, commercial buildings, park model homes and vacation cabins, operating nationwide in 15 manufacturing centers.
A previous owner of Fleetwood Homes Inc., Whitman sold his 50% stake in the company to Cavco in the third quarter. He explained the transaction and commented on Cavco in his third quarter letter:
â€œDuring the quarter, the Fund and an affiliate sold its 50% stake in Fleetwood Homes Inc. ("Fleetwood") to Cavco Industries Inc. ("Cavco"), the other 50% owner of the jointly-owned company. As a reminder, Fleetwood was formed in 2009 to purchase the manufactured housing assets of Fleetwood Enterprises in a bankruptcy auction. In 2010, Fleetwood was the debtor in possession ("DIP") lender to Palm Harbor, a larger and vertically integrated manufactured housing company. This DIP loan was ultimately rolled into a successful credit bid to purchase substantially all of Palm Harbor's assets in 2011. Fund Management has been very pleased with Cavco's operation of Fleetwood, which has been profitable and cash generative since inception despite difficult (but recently improving) industry conditions. The sale price equated to a 29% premium to our cost payable in Cavco stock at about a 10% discount to its current price. Fund Management wanted to take Cavco common stock, as opposed to cash, as we believe considerable upside still exists in Cavco Common. Cavco recently reported very strong results for the calendar second quarter: revenue, operating income, backlog and earnings per share increased by 13%, 70%, 115% and 117%, respectively. Additionally, cash increased by $12 million to $60 million, positioning the company well for future expansion opportunities (Cavco is debt free other than nonrecourse finance subsidiary debt).â€
See Cavcoâ€™s revenue and earnings history:
The company has a P/E of 82.9, P/S of 0.88 and P/B of 2.9.
Total SA (XPAR:FP)
Whitman purchased 823,730 shares of Total in the third quarter when the price averaged $41 per share. The holding has a 1.9% portfolio weight.
With a $98.2 billion market cap, Total SA stock has gained 6% over the past 12 months, to trade at $43.30. It is the worldâ€™s fifth largest publicly traded integrated oil and natural gas company, operating in more than 130 countries and having oil and gas exploration and production activities in more than 50 countries. Based in France, it is 28.5% owned by French shareholders and 29.6% owned by North American shareholders.
In the second quarter, Total reported a 1% decline in adjusted net income to $3.5 billion and a 3% decline in sales to $61.36 billion, from the previous year. Total issued a second quarter dividend of â‚¬0.59 per share. The price of Brent crude in the second quarter decreased 5% to $102.4 per barrel, compared to the previous year.
The company is expecting to benefit from an extended series of start-ups in its Upstream business over the next few years, and its Downstream business began in the second quarter to reflect the benefits of a restructuring program, through which it hopes to make still further changes.
See Totalâ€™s revenue and earnings history:
Total has a P/E of 10.1, a P/B of 1.3 and P/S of 0.55.
Whitman commented on the company in his third quarter letter:
In reviewing our investment in Pargesa, Fund Management noticed that the largest component of its NAV, the common stock of Total S.A. (TOT) ("Total"), was very attractively priced and worthy of a stand-alone investment. Based in France, Total is the fifth largest publicly-traded integrated oil and gas company in the world. The company was incorporated in 1924 and expanded materially through the acquisitions of Petro Fina S.A and Elf Aquitane in 1999 and 2000, respectively. Total has 11.4 billion barrels of proved reserves and annual production of 2.9 million barrels per day (including share of equity affiliates). The company's operations are geographically diverse with reserves distributed as follows: Africa (26% of reserves; 24% of production), Asia (23% of reserves; 20% of production), Americas (19% of reserves; 10% of production), Middle East (17% of reserves; 31% of production) and Europe (15% of reserves and production). Total has significant midstream and downstream operations with interests in 31 pipelines, including eight that it operates and 20 refineries, including nine that it operates. The company is one of the world's leading liquefied natural gas("LNG") players with interests in nine existing plants plus three under construction and an additional four under study. Finally, the company has 14,725 service stations, including 9,100 and 4,500 in Africa and the Middle East, respectively.
Total's management team, led by Chairman and CEO Christophe de Margerie, has an impressive long-term track record: book value per share has compounded at a 15% annual rate over the last ten years (including dividends) during which the company has never lost money. Total has a very strong financial position, and the shares, which offer an attractive 6% dividend (qualified) yield, were purchased at about 7x earnings and a 25% discount to our estimate of net asset value.
Pargesa Holding SA (XSWX:PARG)
Whitman purchased 269,034 shares of Pargesa Holding in the second quarter when the stock averaged $67 per share. It is a 0.84% portfolio weight position.
Pargesa is a $10.58 billion market cap company whose stock price rose almost 8% over the past 12 months. It closed at $68.65 Wednesday. Pargesa is a Swiss-based parent company of Pargresa Group, which owns operating companies in a variety of industries and tries to increase their long-term value. Examples of companies in which it owns a large share include Total (NYSE:TOT), GDF Suez and Pernod Ricard (PDRDF).
In the first half, Pargesa Holding announced a decline in net income to CHF 109.7 million from CHF 406.9 million the previous year. It received CHF 288 million due to the disposal by GBL of its 10% stake in Arkema and a 2.3% stake in Pernod Ricard, which benefited the first half earnings result.
Operating income fell 32%, to CHF 117.6. Pargesaâ€™s net asset value, a key valuation factor for Whitman, was CHF 7.498 million, or CHF 88.6 per Pargesa share, as of June 30, 2013.
Pargesa has a P/E of 13.7, P/B of 0.36 and P/S of 1.19, which is close to a two-year high.
See its revenue and earnings history:
Whitman also commented on the company in his investor letter:
â€œFund Management initiated a position in the common stock of Pargesa Holding, S.A. ("Pargesa"). Pargesa Common had been an investment in the Fund from 2004 to 2010 and was purchased in the Third Avenue International Value Fund in 2011 and discussed in that Fund's April 30, 2011 SemiAnnual Report. Pargesa is a Swiss holding company whose primary asset is a 50% stake in Groupe Bruxelles Lambert ("GBL") another holding company based in Belgium. Through GBL, Pargesa has significant stakes in the common stocks of several European (primarily French) blue-chip issuers including Total S.A., Lafarge S.A., Imerys S.A. and Pernot Ricard S.A. Pargesa is controlled by Albert Frere and Paul Desmarais though the Parjointco holding company that owns 55.6% of the economic shares and 75.4% of the voting shares of Pargesa. Management has an impressive long-term track record of creating shareholder value through growth of net asset value ("NAV"), although the recent performance has been weak as several of GBL's holdings are down significantly since 2007-2008. The underlying holdings seem to be attractively priced with stable or improving business fundamentals. Pargesa Common was purchased during the quarter at a wider than average discount of more than 30% to reported NAV. In 2011, Compagnie Nationale a Portfeuille S.A., another holding company controlled by Albert Frere with indirect stakes in several of the same companies, was privatized at a 22% premium to market and a 7% discount to NAV (several Third Avenue funds owned CNP common stock).â€
See more of Martin Whitman and Third Avenue Managementâ€™s third quarter buys and sells in their portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Martin Whitman.
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