Two of Third Avenue Value Fund’s three new holdings are in the homebuilding sector, reflecting the fund’s faith in the strengthening U.S. housing market.
In the shareholder letter for the second quarter ended April 30, the portfolio managers wrote that a combination of favorable demographics, loosening financial constraints, and better economic trends will provide steady improvement for the housing market in the fund’s investment horizon.
Third Avenue was founded by notable value investor Martin Whitman (Trades, Portfolio); the flagship Value Fund is now managed by Chip Rewey. The fund’s top three holdings as of the second quarter are Cavco Holdings (CVCO, Financial), Bank of New York Mellon (BK, Financial) and Comerica (CMA, Financial).
PNC Financial Services Group (PNC, Financial)
The fund’s largest new holding was 479,200 shares of PNC Financial Services, which traded for an average price of $94.56 during the quarter. The stock now has a 2.38% portfolio weighting.
PNC is engaged in retail banking, corporate and institutional banking, asset management, and others. The stock increased 8% over the past year and closed at $95.65 on June 30. The current P/E ratio is 13.23, and the P/S ratio is 3.33. Based on third-quarter earnings, the Peter Lynch earnings line is at $109.80, indicating the stock is undervalued.
Over the past five years, revenue declined by 2.6%, while EBITDA grew by 6.5%. In 2014, EBITDA per share was $12.29, a slight decline from $12.85 the year before.
The current dividend yield is 2.03%, which is close to the three-year low. The payout ratio is 26%.
Third Avenue purchased 1,479,930 shares of Masco for an average price of $26.94 per share. The new holding has a 2.13% portfolio weighting.
Masco manufactures and installs home improvement and building products such as faucets, cabinets, architectural coatings and windows. Over the past year, Masco’s stock has risen 20%, closing at $26.67 on June 30. When comparing the price to the Peter Lynch earnings line, the stock appears to be undervalued.
The current P/E ratio is 11.24, and the P/S ratio is 1.08. Last year, Masco reported EBITDA per share of $2.75, up from $2.47 the year before. Net income has also rebounded since the housing bust that began in 2008, recording at $856 million in 2014.
Masco’s dividend yield is 1.34%, while the payout ratio is 14%.
Kingfisher PLC (LSE:KGF, Financial)
Third Avenue’s smallest purchase during the quarter was 3,672,276 shares of Kingfisher at an average price of £3.63 per share. The holding has a 1.07% portfolio weighting.
Kingfisher, through its subsidiaries and joint ventures, supplies home improvement products and services through stores located mainly in the U.K., continental Europe and China. The stock declined marginally by 4% over the last year and closed at £3.47 on June 30. Kingfisher’s P/E ratio is 15, and the P/S ratio is 0.76.
EBTIDA per share has largely remained steady over time. In 2014, the figure was $0.39, down from $0.43 the year before.
The current dividend yield is 2.83%, while the payout ratio is 41%.
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