actuant’s shares appear to have fallen out of favor, however, owing to (i) sluggish top-line results in the industrial segment and disappointing margins within the energy group, as reported in the company’s most recent fiscal quarter; (ii) lingering doubts about the sustainability of acquisition-led growth (management recently had to write-down some of the goodwill on the company’s balance sheet); and (iii) uncertainty created by the start of a recent management transition.
While we acknowledge these challenges, we believe the valuation has been overly-discounted in the public markets, that recent results are not indicative of longerterm prospects and that markets ignore a number of important elements relevant to an investment in the company’s stock, including:
• Management has generally been viewed as good capital allocators and has not been afraid to change course when the circumstances so required. For example, they recently divested the company’s lower-margin, commoditized electrical business at a reasonable valuation, while using the sale proceeds to both pay down debt and repurchase stock at what we consider attractive levels.
• The company’s financial strength, the best in years, ought to provide wide flexibility for growth initiatives as well as for returns of capital via share repurchases and dividends.
• The company consistently generates high quality earnings as reflected by the company’s prodigious cash generation. Management’s internal incentives, anchored to cash generation and returns on capital, only serve to reinforce this characteristic.
• at current levels, which approximate the Fund’s cost basis, shares trade at a reasonably attractive 7.5% free cash flow yield (pre-acquisition spending), a level which we feel provides adequate downside protection and translates to a roughly 15% to 25% discount to intrinsic value.
The company’s many strengths, which we feel vastly outweigh any of the noted setbacks, along with recently sluggish share performance, could easily attract the attention of a strategic or financial buyer.
From Third Avenue Management (Trades, Portfolio)'s second quarter 2014 shareholder letter.
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