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Mario Gabelli's Gabelli Asset Fund 3rd-Quarter Commentary

Discussion of markets and holdings

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Nov 04, 2021
Summary
  • Herc Holdings was a primary contributor to performance.
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INVESTMENT SCORECARD

Herc Holdings (0.5% of net assets as of September 30, 2021) (+46%), Sony (

SONY, Financial) (2.7%) (+14%), and Republic Services (RSG, Financial) (1.6%) (+9%) were the three primary contributors to portfolio performance during the third quarter. Herc Holdings hosted an investor day in late September during which the company highlighted positive secular growth trends in the rental equipment industry, expressing the potential to grow their rental revenue by 12%-15% and improve profit margins over the next three to five years. Sony hosted a PlayStation Showcase in early September, which revealed that the company’s studios are working on a robust pipeline of games for the PlayStation 5. Over the next two years, Sony is set to release sequels to its highest selling video game franchises, such as Spiderman and God of War, along with new franchises such as Marvel’s Wolverine. The quarter also saw the IPO of Universal Music, one of Sony Music’s main competitors, which led investors to reevaluate positively the value of Sony’s Music division. Republic Services reported solid second quarter results that highlighted improvements in gross margins as well as notable strength in volumes. The company has high pricing power and can leverage M&A opportunities to help drive sustained accretive inorganic growth.

Brown-Forman (

BF.B, Financial) (2.4%) (-11%) shares declined in the third quarter as investors reacted to the company’s operating results for the year ended April 30, 2021, which reflected accelerating volume and revenue growth trends offset by weaker than expected margins. Margins are being pressured by higher raw material costs (mainly glass, wood, and agave), tariffs on American whiskey in the European Union, and general supply chain disruption. While these cost pressures are likely to persist in the near term, Brown-Forman continues to deliver best-in-class revenue growth from its on-trend portfolio anchored in premium American whiskey and tequila. AMETEK (AME, Financial) (2.8%) (-7%) shares declined during the quarter as the company indicated on its earnings call that raw material, freight, and labor inflation continue to increase. Nonetheless, the pricing power of AMETEK’s niche businesses are enabling the company to raise prices and maintain a positive price-cost spread on a full year 2021 basis. Shares of Newmont Mining (NEM, Financial) (1.2%) (-14%) also declined in the quarter, largely in line with share prices of other gold miners. Gold mining equities dropped despite the fact that the price of gold fell by only 1% during the quarter. This was based on concerns about the potential for margin compression for gold mining companies if cost inflation escalates while the price of gold declines.

LET'S TALK STOCKS

AZZ Inc. (

AZZ, Financial) (less than 1.0% of net assets as of September 30, 2021) (AZZ – $53.20 – NYSE) is a global provider of galvanizing and avariety of metal coating solutions, welding solutions, specialty electrical equipment, and highly engineered services to a broad range of markets, including transmission, distribution, renewable energy, industrial, and refining. The company’s Metal Coatings segment (which accounts for $460 million, or 55% of total company revenue) is experiencing strong demand across solar, agriculture, bridge and highway, and truck and trailer end markets. AZZ’s home market of Texas, in particular, is experiencing an acceleration of wind and solar installations, which require the supporting infrastructure to be hot-dip galvanized to avoid corrosion and erosion. Management is also in advanced stages of exploring a sale of all or part of AZZ’s Infrastructure Solutions segment to focus on the company’s core higher-margin Metal Coatings franchise.

Herc Holdings Inc. (

HRI, Financial) (0.5%) (HRI – $163.46 – NYSE), based in Bonita Springs, Florida, is the third largest equipment rental companyin the United States. HRI was spun out of former parent Hertz on June 30, 2016. Underemphasized as part of a significantly larger car rental company, HRI has worked for the past three years to put its operating metrics in line with larger, better known peers such as United Rentals. The company is well positioned to generate considerable cash as the U.S. equipment rental market grows over the next several years. Additionally, management efforts to improve profitability metrics to more closely align with its larger peers could result in valuation multiple expansion.

CNH Industrial NV (

CNHI, Financial) (3.3% ) (CNHI – $14.70 – NYSE), with headquarters in London, England, and Burr Ridge, Illinois, is a globalcapital equipment manufacturer that was demerged from parent Fiat in 2013. CNHI is unique in that it has leading positions in a variety of global machinery markets. It is best known for its agricultural equipment business, consisting of Case IH, New Holland Agriculture, and Steyr brands. The company’s other businesses include IVECO, a leading global truck and bus manufacturer, as well as Case and New Holland construction machinery. Finally, FPT Industrial provides engines and transmissions for the company’s captive businesses and also sells to other machinery manufacturers. The company’s new CEO, Scott Wise, is committed to CNHI’s financial engineering plan by which it will separate its Off Highway business from its Truck and Engine business via tax free spin. Additionally, the company announced in June it would be acquiring Raven Industries (RAVN) for $58 per share, adding to the company’s growing capabilities in precision agriculture technology.

When discussing specific stocks in the portfolios of the Funds, favorable earnings prospects do not necessarily translate into higher stock prices, but they do express a positive trend that we believe will develop over time. Individual securities mentioned are not necessarily representative of a Fund’s entire portfolio. For the holdings discussed, the percentage of the Fund’s net assets and their share prices stated in U.S. dollar equivalent terms are presented as of September 30, 2021.

Returns represent past performance and do not guarantee future results. Investment returns and the principal value of an investment will fluctuate. When shares are redeemed, they may be worth more or less than their original cost. Current performance may be lower or higher than the performance data presented. Visit www.gabelli.com for performance information as of the most recent month end.

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Disclosures

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The views of this author are solely their own opinion and are not endorsed or guaranteed by GuruFocus.com
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