Third Avenue Management (Trades, Portfolio) was founded by Marty Whitman in 1974 and now has teams of portfolio managers working on its portfolios. In its third quarter letter, managers said they were not having trouble finding good value investments in the strong markets. They wrote:
“While current earnings and price trends are important, our investment process extends well beyond them. Our process is rooted in evaluating the entire enterprise, as opposed to focusing on more idiosyncratic quarterly earnings reports. In our analysis we are essentially counting up the assets and ascertaining a fair NAV for a company as if we were purchasing the entire business. From there we assess the company's balance sheet and credit profile, to ensure that it has the financial capacity to meet obligations and investment opportunities, as well as the ability to survive market storms.”
Yet Third Avenue in the third quarter purchased only two new stocks, both of them forest products companies. Its portfolio as of June 30 contains 37 stocks with a total value of $2.07 billion.
The New Stocks
Weyerhaeuser Co. (WY, Financial)
Third Avenue purchased 1,886,790 shares of its largest new stock, Weyerhaeuser Co., which makes it 2.9% of its portfolio. Weyerhaeuser had an average price of $33 in the third quarter.
Third Avenue commented on the new investment in their third quarter 2014 letter:
“The Fund initiated a position in Weyerhaeuser (WY) as the company moved to finalize the distribution of its WRECO homebuilding subsidiary in an exchange offer with Tri Pointe Homes Inc. Weyerhaeuser is a Real Estate Investment Trust with wood products and wood fiber businesses, and the second largest owner of timberlands in the U.S. It is worth noting that Weyerhaeuser was sourced with TAM’s Real Estate team and is a solid example of the ability of the Fund to pull ideas from across the entire TAM research team. The Reverse Morris Trust distribution of WRECO was structured as an exchange offer, whereby shareholders could choose to accept shares in the new Tri Pointe, or to retain their interest in Weyerhaeuser. We chose not to indicate for Tri Pointe shares, and were pleased that the exchange offer was oversubscribed so that we retained our full position in Weyerhaeuser. The net effect of the transaction from our perspective was a resource conversion event in which WRECO was traded for a large repurchase transaction, representing roughly 10% of Weyerhaeuser shares plus $700 million in cash.
We see the remaining businesses of Weyerhaeuser, led by CEO Doyle Simons, trading at a substantial discount to our estimated NAV combined with a solid outlook of secular growth, selfhelp margin improvement initiatives and a good way to gain exposure to a recovery in the U.S. housing market.
Post the WRECO divestiture, the remaining operations are Timberlands (about 46% of operating income), Wood Products (35%) and Cellulose Fibers (19%). The timber division owns forests in the U.S., Canada and Uruguay, and recently added 645,000 acres of strategic Pacific Northwest forest with the purchase of Longview Timber in July 2013. The Longview acquisition not only provides operational scale and cost reduction opportunities, but increases Weyerhaeuser’s exposure to the lucrative Asian export log markets, primarily China and Japan. Weyerhauser is able to accelerate the harvest on its acquired Longview acreage, as the average age of the acquired trees was over the optimal twenty five to forty year growth cycle the company targets. The Wood Products operations produce Lumber, Oriented Strand Board (OSB) and Engineered Wood Products and have clear upside cyclical leverage to the nascent recovery in the U.S. single family housing market. The Cellulose Fiber division produces fluff pulp and specialty pulps used in a wide variety of consumer end markets. Division management is focused on reducing costs and increasing manufacturing efficiency to compete in this cyclical industry.”
Weyerhaeuser Co. started out as Weyerhaeuser Timber Company, incorporated in the state of Washington in January 1900 when Frederick Weyerhaeuser and 15 partners bought 900,000 acres of timberland. Weyerhaeuser Co. has a market cap of $17.11 billion; its shares were traded at around $32.60 with a P/E ratio of 29.00 and P/S ratio of 2.29. The dividend yield of Weyerhaeuser Co. stocks is 2.90%. Weyerhaeuser Co. had an annual average earnings growth of 46.50% over the past five years.
Canfor Corp. (TSX:CFP, Financial)
Third Avenue purchased 823,994 shares of Canfor Corp. in the third quarter, making it 0.84% of its portfolio. The stock’s price average was $24 for the quarter.
Canfor Corp. was incorporated on May 17, 1966, under the British Columbia Company Act. Canfor Corp. has a market cap of $3.66 billion; its shares were traded at around $26.32 with a P/E ratio of 23.40 and P/S ratio of 1.14. Canfor Corp. had an annual average earnings growth of 56.00% over the past five years.
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