With volatility and enthusiasm for growth stocks marking the year-end market, long-term investors Third Avenue Management (Trades, Portfolio) spotted some compelling areas facing temporary setbacks to invest in and gave their trading details in their fourth quarter portfolio update Tuesday.
Third Avenue Management (Trades, Portfolio), a firm chaired by value investing pioneer, Marty Whitman, largely ignores macroeconomic whims in favor of buying companies based on their estimate of the worth of the enterprise. The managers also embrace growth as long as it means growth of book value at double-digit rates. They don’t fall for short-term catalysts, buybacks and short-term earnings boosts that draw many investors in the current environment.
The market “overly” punished a number of Third Avenue’s holdings for minor setbacks during the quarter ended Oct. 31, manager said. One group of “high conviction” companies in particular they believed to “continue to compound long-term value” but were “severely punished by the markets as they weathered short-term bumps.”
“While our fundamental work did identify the potential for some of the short-term bumps our companies experienced, we felt the long-term investment cases, based on our three pillars, would mitigate price volatility over the short term,” managers said.
The companies Third Avenue pointed were: Weyerhaeuser (WY, Financial), Comerica (CMA, Financial), CBS Corp. (CBS, Financial), Brookdale Senior Living (BKD, Financial) and Covanta (CVA, Financial).
Weyerhaeuser Co. was the second largest holding in Third Avenue’s portfolio, representing 6.2% of holdings. The company’s stock price declined 3.7% for the quarter, and Third Avenue increased its holding 7.4% from the previous quarter. Managers bought 228,120 shares, making their total position 3,398,210 shares. They have held a position since the third quarter of 2014.
The short-term headwinds afflicting Weyerhaeuser’s price for the third quarter included a decline in China, a weak U.S. housing market, port strikes and maintenance outages, Third Avenue said. The issues caused the company to reduce their full-year earnings per share guidance.
In the third quarter, Weyerhaeuser reported $1.8 billion, a modest decrease from $1.9 billion for the third quarter 2014. Third quarter earnings were $180 million, or 35 cents per diluted share, compared to $1.2 billion, or $2.15 per diluted share in the third quarter 2014, which included gains of $975 million from discontinued operations and special items mostly from a divestiture of Weyerhaeuser Real Estate Company.
Weyerhaeuser has also grown its book value at a five-year annual rate of 7.8%.
Comerica, the largest bank headquartered in Texas, is the fourth largest position in Third Avenue’s portfolio. The company’s shares slumped 9.3% for the quarter, and Third Avenue actually trimmed its position by 11.6%. It sold 231,000 shares, for a total position of 1,757,349 shares.
Comerica stock suffered from exposure to energy and low interest rates, causing it to reduce its earnings forecast for 2015.
The bank had third quarter net income of $136 million and earnings per share of 74 cents, compared to $154 million and earnings per share of 83 cents for third quarter 2014. Net interest income was $422 million, compared to $414 million.
It also expects flat full-year loan growth, relatively stable net interest income and higher noninterest expenses and provision for credit losses for 2015 over 2016.
The average annual book value growth rate for Comerica over the past five years was 5.4%.
CBS Corp., the mass media company, saw its shares decline 19.4% for the quarter. Third Avenue increased its position 19.8% from the previous quarter to 1,164,700 shares – its largest buy since starting the position a year ago.
CBS Corp.’s share price decline came as market investors grew concerned about the broader cyclical advertising market. In the third quarter the company’s revenue declined $3.26 billion from $3.37 billion a year earlier, led by declines in its Cable Networks and Local Broadcasting segments. Net earnings also declined to $426 million, or 88 cents per diluted share, from $1.6 billion, or $3.03 per diluted share. CBS Corp. also had free cash outflows of $289 million compared with $400 million.
CBS Corp. trades with a P/E ratio of 14.6, P/B of 3.7 and P/S of 1.69.
Brookdale Senior Living (BKD, Financial)
Shares of Brookdale, the largest operator of senior housing in the U.S., sagged 41.4% for the quarter. Third Avenue responded by boosting its position in the company 43%, to 1,660,700 shares, at its lowest average purchase price of $22 since initiating the position in the fourth quarter 2014.
Two short-term issues caused negative earnings revisions for the company last year, Third Avenue said: a merger with competitor Emeritus the previous year that led to lower-than-expected occupancy, and executive turnover that stoked uncertainty.
Brookdale reported cash from facility operations of 59 cents per share for the third quarter, from 60 cents per share a year ago, in line with the company’s expectations. The company maintained its full-year CFFO guidance in the range of $2.35 and $2.45.
Brookdale has a P/B of 1.37 and P/S of 0.7.
Covanta, a waste-to-energy company, saw its shares slide 18% for the quarter. Third Avenue held its position steady, at 3,606,707 shares, making the company its sixth largest holding.
According to Third Avenue, the company’s price decline stemmed from a delay of a new facility in Canada, and lower metals and electricity problems. Covanta’s third quarter revenue increased by $8 million to $422 million from the same quarter last year, driven by a new contract and environmental service acquisitions. Net income came to $34 million, compared to $7 million. Free cash flow also increased by $3 million to $107 million.
For full-year 2015, Covanta affirmed its guidance of adjusted EBITDA in the range of $420 million to $460 million, and free cash flow in the range of $130 million to $170 million, both lower than their respective results last year.
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