Multi-Color Corporation (NASDAQ:LABL) 1 is a good example of a name that is not in our benchmark and is a high conviction top ten holding for the Fund. The company produces numerous types of labels for a variety of consumer products, such as detergent, wine bottles, motor oil, etc. Multi-Color meets the tenets of our investment philosophy of creditworthiness, book value compounding and a discounted valuation.
On the first tenet, Multi-Color has manageable debt. Our companies must have the wherewithal to weather economic cyclicality as well as the ability to take advantage of opportunities within their industry. Excessive debt brings more than financial risk. Many companies have declined in value not because they could not repay their debt, but because they did not have left over money to reinvest to develop new products or keep up with innovations.
On the second tenet, Multi-Color has compounded value over time through both increasing margins and expanding into new markets. Many consumer products are indeed judged by their label "covers," and thus, labels serve a low-cost but critical role in marketing and counterfeit protection. The label cost is low relative to the product and price is not a top decision criteria for customers. The outlook for compounding should exist for many years, spurred by world-wide growth of consumer products.
The stock was inexpensive when we bought it in 2014 at about $40, fitting our discounted valuation tenet. We think today's valuation at around $70 is still compelling due to its growth potential and its solid financial base.
From Third Avenue Management (Trades, Portfolio)'s third quarter 2016 commentary.
