Martin Whitman
is in the process of handing the reigns over to his successor at
$3.8 billion
Third Avenue Management
, Ian Lapey, who was promoted to sole portfolio manager on March
1, 2012. Whitman remains as chairman of the board of trustees and
mentors the investor team. Year to date, the fund has returned
12.68%, recovering from its 11.68% downturn in the last year.
The investors in the third quarter bought four new stocks: Devon
Energy (
DVN
), Comerica Inc. (
CMA
), Alleghany Corp. (
Y
) and White Mountains Insurance Group (
WTM
).
In his firm's
third-quarter letter
, they reiterated that the firm emphasizes quantity and quality
of a company's resources when choosing stocks, namely, companies
with a lot of cash and little to no debt. As long-term,
buy-and-hold value investors, in their third quarter they bought
conservatively valued holdings, primarily financials.
Third Avenue bought 518,149 shares of
Devon Energy Corp. (
DVN
)
in the second quarter at an average price of $63 per share. Devon
Energy is an oil and gas exploration, development and production
company with U.S. and international operations.
Devon ended the first quarter with $7.1 billion in cash,
significantly higher than the $3 billion it had the year prior.
It also has approximately $14.4 billion in long-term liabilities
and debt, an increase from $9.6 billion the year prior, and has
been increasing revenue each year since it met a cliff in 2009.
According to
GuruFocus' Valuations Tab
, Devon Energy trades for a Graham Number of $61.15, slightly
above its Tuesday share price of $55.24. Tangible book value is
$39.3, intrinsic value according to the DCF calculator is $43.22,
and it has a negative 0.04% rate of return and 13.8% earnings
yield.
Devon began 2012 with a record-breaking quarter. The company
averaged 694,000 oil-equivalent barrels (Boe) per day, the
highest daily production rate in history in its North American
onshore properties, and a 10% increase from the prior year. Its
liquids production increased for the sixth consecutive quarter to
256,000 Boe per day, driven by a 26% increase in oil production.
Third Avenue purchased 490,000 shares of
Comerica Inc. (
CMA
)
at an average price of $31 in the first quarter. Comerica is a
bank holding company with businesses that engage in corporate and
consumer lending, mortgage loans, small business and individual
banking, and mutual fund and annuity products.
Comerica currently trades for $30 per share, and by comparison
has a Graham number of $45.61, tangible book of $35.40, intrinsic
DCF value of $62.16, rate of return of negative 2.2% and earnings
yield of 10.6%.
The firm commented on this holding in his third-quarter investor
letter:
:
During the quarter, we added to our existing position in Key
Common and initiated a new position in Comerica Common (
CMA
). At quarter end, the two positions accounted for 3.4% of the
Fund's net assets. Comerica Common was identified by Vic
Cunningham. Comerica Incorporated is a financial holding company
based in Dallas with subsidiaries engaged in retail and business
banking and wealth management. The management team, led by
Chairman and CEO Ralph Babb, has an impressive longterm track
record, having avoided many of the consumer related problem areas
in 2007 and 2008. As a result, the company's tangible book value
is roughly flat compared to five years ago, a considerable
accomplishment in light of the financial crises. The current
earnings outlook is subdued owing to depressed net interest
margins (3.2%, versus 3.6% to 4.0% historically) and tepid loan
growth (2% in the first quarter). Nevertheless, the company
appears poised to generate improved returns over the next several
years, owing to its low cost deposit base, strong business
lending franchise in its core markets (Texas, Michigan,
California and Florida) and strong capital position (10.3% Tier 1
Capital ratio). The company recently passed the Fed's
Comprehensive Capital Analysis and Review ("CCAR") stress test
and was approved to repurchase $375 million in stock (about 6% of
the company's outstanding shares) over the next year. The Fund's
initial position in Comerica Common was acquired at about 13
times earnings and a slight discount to tangible book
value.
Third Avenue bought 39,898 shares of
Alleghany Corp. (
Y
)
at an average price of $333 in the first quarter. Alleghany Corp.
is an insurance and financial services company.
Alleghany in the first quarter of 2012 had $1.1 billion in cash,
significantly increased from the $311 million in had the year
prior, due primarily to a merger. It has $1.9 billion in
long-term liabilities and debt. The company has also produced
strong cash flow annually for the last decade.
Alleghany is selling at a substantial discount to several of its
valuation numbers. On Tuesday, it is trading for $341.68 per
share, and has a Graham number of $667.49, tangible book value of
$672.80, and intrinsic DCF value of $924. Its rate of return is
5.63, and earning yield is 24%, the highest of Whitman's new
purchases.
Alleghany just completed a merger with Transatlantic Holdings on
March 6, so its first-quarter results include 25 days of
operations with Transatlantic. As a result, in the first quarter,
shareholders' equity increased to approximately $6.2 billion,
from $2.9 billion at year-end 2011.
The firm made these comments on Alleghany in his investor letter:
:
We initiated a position in Alleghany Common (
Y
), which was purchased in TASCX and discussed in last quarter's
TASCX shareholder letter. Curtis Jensen and I attended a lunch
with a small group of investors and Alleghany's CEO, Weston
Hicks, in April. Weston seems to be our type of CEO: he is
non-promotional and focused on generating shareholder value by
growing book value per share. The company has no dedicated
investor relations person and does not do quarterly earnings
calls, but instead provides comprehensive financial disclosures
aimed at enabling long-term investors, as opposed to short-term
speculators, to make informed investment decisions. Weston's
presentation to investors consisted of a one page Excel
spreadsheet showing the company's performance since 2002, when he
joined the company. Over this period, the company's average
combined ratio was 90% (i.e., a 10% underwriting profit margin),
and book value per share increased at a 9% compounded annual
growth rate ("CAGR"). This growth was particularly impressive
given the difficult underwriting environment over the period with
competitive pricing and an elevated level of insured losses.
Future book value growth should be partially driven by the
company's 2012 purchase of Transatlantic, a leading global
reinsurer. This transaction appears to have been well timed, as
it was completed at a significant discount to tangible book value
and reinsurance rates are improving in 2012. Alleghany also
recently announced a small acquisition of Bourn & Koch, Inc.,
an Illinois-based manufacturer of precision machine tools. This
company will join several other noninsurance investments in
Alleghany's portfolio and is representative of management's
opportunistic approach and willingness to look outside the
insurance industry to enhance shareholder value. Shares of
Alleghany Common were purchased at a discount to tangible book
value.
Third Avenue bought 21,628 shares of
White Mountains Insurance Group (
WTM
)
at an average price of $517.70 in the second quarter. White
Mountains Insurance is a property, casualty insurance and
reinsurance company based in Bermuda.
At the end of the first quarter, White Mountains had $1.5 billion
in cash, flat from the previous year, and $1 billion in long-term
liabilities and debt. For the last three years, revenue has been
falling, though it has been improving for the last three
quarters.
White Mountains is also inexpensive compared to several of its
valuation numbers. Alleghany is trading for $522.63 per share,
compared to a Graham number of $909.27, tangible book value of
$650 and intrinsic DCF value of $341.48. White Mountains has a
negative rate of return of 1.97% and earnings yield of 11%.
In the third-quarter letter, the firm commented on White
Mountains:
:
We also initiated a position in the common stock of White
Mountains Insurance Group Ltd. (
WTM
), a Bermuda-based holding company whose principal businesses are
conducted through property and casualty insurance and reinsurance
subsidiaries. White Mountains Common was recommended for
investment last year by John Mauro, a research analyst on Third
Avenue's international team, when the company announced the sale
of its Esurance subsidiary at a terrific price (about 2.5 times
tangible book value) to the Allstate Corporation. White Mountains
Common was subsequently purchased in the Third Avenue
International Value Fund and discussed in that fund's July 31,
2011 shareholder letter. Impressively, White Mountains' tangible
book value has increased at about 15% per year since 1985, with
much of the growth driven by timely resource conversion activity
(e.g., buying and selling of businesses), such as the recent
Esurance sale.
In recent years, White Mountains' management has also been
engaged in precisely the type of resource conversion activity
discussed in Martin Whitman's Chairman's letter this quarter,
e.g., repurchasing White Mountains Common. Since 2007, White
Mountains has repurchased 37% of its outstanding common shares in
a combination of open market repurchases, privately negotiated
transactions and tender offers. Most recently, the company
repurchased about 11% of its outstanding shares in a tender offer
at $500 per share in March 2012 (versus a price of $523 per share
on April 30, 2012). White Mountains Common was purchased during
the quarter in the Fund at a modest discount to the company's
March 31, 2012 book value per share of $560.
For more of Martin Whitman's third-quarter buys and sells, see
his portfolio here. Also check out the Undervalued Stocks, Top
Growth Companies and High Yield stocks of Martin Whitman.About
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