Marty Whitman (1/23/01) Interview:
Tuesday, January 23, 2001
Portfolio Manager of the Third Avenue Value Fund
Marty Whitman Profile
Third Avenue Funds
Sage Host: Please welcome Marty Whitman, portfolio manager of the Third Avenue Value Fund [TAVFX], co-portfolio manager of Third Avenue Small-Cap Value Fund [TASCX] and Third Avenue Real Estate Value Fund [TAREX] for Third Avenue Funds. For more information, call 800-443-1021 or visit www.mjwhitman.com.
Marty Whitman: Good evening. It's nice to be back. I would say in general we're buying securities in three areas at present: 1) common stocks in companies selling at under 10 times our best estimate of 2001 or 2002 earnings; 2) common stock issues selling at, at least 40 percent discounts from readily ascertainable net asset values (NAVs); and 3) credit instruments, the debt of certain stressed issuers.
The Chat
Question: Are oil and commodities making a secular bull rise?
Looks that way.
Question: What is your opinion of the automobile industry now and going forward, specifically companies such as Dana Corporation [DCN] and Ford Motor Company [F]?
Our big investment is in Toyoda Automatic Loom Works, Ltd. [TYDAF], a way of buying into Toyota Motor Corporation [TM] at a discount of as much as 50 percent. Dana looked okay, but I never bought it. I passed on Ford.
Question: Do you feel the reserves of $1.3 billion make USG Corporation [USG] a safer equity bet?
Probably. We've been investing heavily in USG credits.
Question: Do you have an exit strategy for AVX Corporation [AVX]?
No. The one passive components company in which we have invested which might be a takeover candidate is KEMET Corporation [KEM].
Question: With [Warren] Buffett buying Johns Manville Corporation [JM] and USG [USG], don't you think he understands the [asbestos] liability since Berkshire Hathaway Inc. [BRK.A or BRK.B] is 80 percent insurance business?
If you get the most recent issue of Outstanding Investor Digest there is a long series of statements that I make comparing what Buffett is doing in USG with what we are doing. I think Buffett understands asbestos liability very well. We read and subscribe to all literature about asbestos liability, including comprehensive reviews of court records throughout the country.
Question: Will you now hold onto your USG [USG] equity after the increase in reserves?
At these prices, certainly! Probably under most foreseeable circumstances.
Question: Sprint Corporation [FON] and WorldCom, Inc. [WCOM] collapsed. Is there good value in these stocks now?
Still tough for me to analyze them. I haven't figured it out.
Question: Is it still a good time to purchase AVX [AVX] at its current price?
Yes.
Question: What is your take on Rite Aid Corporation [RAD]?
I don't know. It is not that I haven't looked; I just haven't reached a conclusion. Probably if I were to be involved in Rite Aid, it would be as a creditor.
Question: Is this USG [USG] debt available on the market or is it not actively traded?
It's actively traded. Two issues: 9 1/4 due September 15, 2001 and 8 1/2 due, I think, in 2004.
Question: What got you interested in Legg Mason, Inc. [LM]?
We have owned Legg Mason since 1993, at which time we invested heavily in regional broker/dealers who had a large presence in money management. The broker/dealer industry was going through a recession in 1993.
Question: Federal-Mogul Corporation [FMO] is under $5 a share. Any opinion on it as an asbestos liability play?
Yeah, I looked at it. It's very hard for me to do a common stock of a company with large asbestos liabilities.
Question: In your opinion, are we entering a secular bull market for commodities?
I don't have a clue.
Question: How did you get involved in the Third Avenue Real Estate Value Fund [TAREX] and is it tough to find good values for?
Real estate is relatively easy for us to analyze because we like to buy securities selling at huge discounts from readily ascertainable appraised values. We recently have increased our positions substantially in the common stocks of Forest City Enterprises, Inc. [FCE.A], Tejon Ranch Co. , Alico, Inc. [ALCO] and Catellus Development Corporation [CDX].
Question: Do you feel the time is right to repurchase Applied Materials, Inc. [AMAT] or KLA-Tencor Corporation [KLAC] for the fund?
Probably, but we have been purchasing other semiconductor equipment common stocks, to wit: FSI International, Inc. [FSII], Electroglas, Inc. [EGLS], Electro Scientific Industries, Inc. [ESIO], Brooks Automation, Inc. [BRKS] and until recently Credence Systems Corporation [CMOS]. I may start on Applied Materials, but so far haven't yet.
Question: What do you think of Nokia Corporation [NOK]?
For participation in the cellular phone industry, I think there are infinitely better values in AVX [AVX], KEMET [KEM] and Vishay Intertechnology, Inc. [VSH].
Question: Making five-year earnings estimates for a cyclical company is really hard to do. How did you estimate five-year operation profits of $500 to $600 million for USG [USG]?
Well, average earnings of the past three years have been a clue. Plus, after 2001 they operate only brand-new plants [at] very low cost and they are the dominant factor in their industry. I think they make it easy if return on equity (ROE) approaches 20 percent.
Question: If you felt USG [USG] was headed to bankruptcy, you would sell at current prices, yes?
No. First of all, if there were to be a bankruptcy it would probably only be the bankruptcy of the United States Gypsum Co. subsidiary. The USG Corporation has substantial earnings and assets away from the United States Gypsum Co. subsidiary, apparently without asbestos taint. As far as the USG credits are concerned, there is no way they can ever be subordinated to perfected asbestos claims, either out of court or in Chapter 11. I suggest you read the president's letter in the third annual report.
Question: What, if any, companies do you presently like that you don't own?
None! <laughing> We've got so much surplus cash now that we're looking very hard to invest.
Question: What would cause you to sell Nabors Industries, Inc. [NBR]? I am very bullish on this sector.
As you know, I'm a founder of that company and a director! Other than estate planning, I'm not likely to sell it. I don't think the fund would sell its position, either.
Question: Do you intend on keeping the shares of the company that is acquiring Silicon Valley Group, Inc. [SVGI]?
Good, tough question. It is a wonderful company priced like Applied Materials [AMAT]. However, because of price considerations we've lightened up modestly on our huge position in Silicon Valley Group. ASM Lithography Holding N.V. [ASML] seems to have promise for becoming the leading growth company in the industry over the next five to seven years. Unfortunately, it's priced that way.
Question: What bank stocks do you like?
We have never purchased any financial institution common stock except at a discount from adjusted book value. Our only recent purchase was Woronoco Bancorp, Inc. [WRO]. I think a lot of converted mutuals are selling at very attractive prices and subject to doing more research we'll probably pick up a few of those, besides Woronoco.
Question: What is your estimated sales growth rate for Vishay [VSH]?
I don't know. It's whatever the company says. I would assume that after the first half [of the year], growth and passive components ought to be at least 20 percent. The compounded growth rate for Siliconix incorporated [SILI] I just don't have a handle on. Among the passive component manufacturers, Vishay is the only one likely to be engaged in an aggressive program to acquire other companies.
Question: Is Nokia Corporation [NOK] a good buy now?
I feel much more comfortable participating in the industry in AVX [AVX], KEMET [KEM] and Vishay [VSH].
Question: Have you ever shorted a company in any of your funds?
No. The reason for that is in order to short you have to make market decisions. Everything we do in the funds revolves around investment decisions, not market decisions. Put simply, we value companies. We don't predict market prices.
Question: Are you still positive about KEMET [KEM]?
Yes, very.
Question: How did you get involved in investing in Trinity Industries, Inc. ?
My recollection is off the "new low" list. I've known the company for many years since in the early 1980s, when they bought the manufacturing operations of GATX Corporation [GMT] for railcars.
Question: What factors do you consider important to the concept of value investing?
For common stocks, four factors: 1) extremely strong financial position; 2) reasonably competent management in tune to outside stockholder interests; 3) understandable business; and 4) common stock price not more than 50 percent of what we think the security would be worth with a business, a private company or a takeover candidate.
Question: Why is there no insider buying in KEMET [KEM], AVX [AVX] or Vishay [VSH]? Don't they like to make money?
AVX is 70 percent owned by Kyocera Corporation [KYO]. The dominant shareholder of KEMET is Citicorp Ventures, the head of which company called me recently to say he was buying AVX common, since he was restricted from personally buying KEMET common. Vishay recently filed a 1993 at registration to issue securities to use in acquisitions. The one dominant shareholder of Vishay, Dr. Zandman, is a huge Vishay shareholder.
Question: What investors have influenced you most in your career?
I'd say the most was Hal Friedlander, who was my boss when we worked for William Rosenwald; Gene Isenberg, with whom I've been investing for 50 years (he's now chief executive officer (CEO) of Nabors Industries [NBR]); and Bert Cohn, a partner at First Manhattan.
Question: What is your opinion on WorldCom, Inc. [WCOM]?
I don't know. I've had trouble analyzing that.
Question: What are your top five holdings?
USG Corporation [USG], AVX common [AVX], MBIA Inc. common [MBI], Toyoda Automatic Loom Works, Ltd. [TYDAF], Tejon Ranch Co. , The Tokio Marine and Fire Insurance Company, Limited [TKIOY], Silicon Valley Group, Inc. [SVGI] and The First American Corporation [FAF] (formerly First American Financial). Those are the biggies.
Question: Do you personally visit the management of companies on your buy list?
Mostly, yes.
Question: Do you have any rules for determining the private value? Is it in your latest book?
Yes. It varies with what we're doing. For high-tech small caps, never pay more than if you are a first stage venture capitalist. For financial institutions, [look for a] discount from adjusted book. For real estate, [look for a] discount from appraised values.
Question: Do you like any retail stocks or stocks in the clothing industry?
No, I hate the group.
Question: I would like to know if you feel White Mountains Insurance Group, Ltd. [WTM] is a great value at its current price?
Yes. Also high risk.
Question: Are you still positive on the Contract Research Organizations (CROs)?
Yes, though I wish they hadn't gone up recently.
Question: How about Digital Subscriber Line (DSL) companies?
We looked at Covad Communications Group, Inc. [COVD], looking to be a creditor, and decided it was too hairy for us. And the bonds are selling in the $20s.
Question: What is your view on active versus passive investing? Most cannot beat the index. You're an exception.
I think I have a very good discussion about the difference between active and passive [investing] in chapter one of my book. Incidentally, in much of our work in distress credits we are active, not passive.
Question: Why will California utility bonds go to 100 cents on the dollar?
The mortgages, either out of court or in Chapter 11.
Question: How did you decide that California utility bonds will get a 100 cents on the dollar in bankruptcy?
By way of background I was a principal holder of mortgages of public services in New Hampshire and also a large first mortgage holder [for] Tucson Electric [now UniSource Energy Corporation [UNS]] and El Paso Electric Company [EE]. In the early 1980s I did investment banking for Long Island Lighting. I have an extended write-up of utility bankruptcy that I did in 1985. It's a chapter in my book or else if you write to my office I can send you a copy of that write-up entitled, "Myths and Realities About Electric Utility Bankruptcy." My e-mail address is mjwny@mjwhitman.com. To have the confidence I have, you have to know something about the bankruptcy code, also, and the provisions for adequate protection payments to adequately secure lenders.
Question: I know it's a tops-down call, but investors are NOT scared. Does this feel like 1989 in Japan?
It beats me. I wasn't in Japan in 1989.
Question: What do you think of Citigroup Inc. [C] as a long-term holding?
Probably okay, but I don't have eminent knowledge.
Question: What sectors do you see as the leaders in 2001?
We're price-conscious, rather than outlook-conscious. Areas where I think the pricing is terrific are certain asbestos-tainted credits, certain utility first mortgages, a few junk bonds manufacturers of passive components, certain semiconductor equipment manufacturers, certain real estate companies and certain general Old Economy manufacturers.
Question: Why do you hate retail stocks?
Businesses are badly financed. Because of what they owe the trade to banks [and] the landlords, just as a guess. During the last 10 years of prosperity probably as many publicly traded retailers had to reorganize in Chapter 11 as did not. In other words, for every Wal-Mart Stores, Inc. [WMT] and Target Corporation [TGT], there was an Ames Department Stores, Inc. [AMES], The Caldor Corporation, Kmart Corporation [KM], Federated Department Stores, Inc. [FD] or Bradlees, Inc. [BRADW].
Question: Will Xerox Corporation [XRX] go down the tubes?
I don't know and it's not that I didn't look. I didn't think the consolidated public statement gave me enough information so that I could have a good judgment. At the minimum I would need consolidating financial statements.
Question: What do you estimate that Third Avenue Value Fund's [TAVFX] price to conservatively appraised value is at the moment? A bigger discount would imply a safer investment in Third Avenue Value Fund at this time.
I agree with the latter. I really haven't figured out except for those securities in the portfolio that are there because they represent discounts of 40 percent or more from that asset value. My recollection is that those securities constitute maybe 15 percent of the portfolio.
Question: Do you have an opinion on Hitachi, Ltd. [HIT]? It is selling near tangible book value.
I should look at it. I will, [but] I haven't. What a comedown. I looked at it a few years ago and it was priced like Cisco Systems, Inc. [CSCO].
Question: Have you looked at the debt of The FINOVA Group, Inc. [FNV] or Conseco, Inc. [CNC]? As you know, [Warren] Buffett has purchased both.
I passed. I do not buy debts of holding companies where their assets consist only of the common stocks of highly leveraged, highly regulated subsidiaries. Not my swamp.
Question: Is the market overreacting to MBIA Inc.'s [MBI] exposure?
Probably. As you know, I don't think that they have any exposure because I think the mortgage bonds they insured are not a risk in a reorganization.
Question: How about Scottish Power plc [SPI]?
Don't know it.
Question: I just cashed out $45,000 in Guardian Park Avenue Fund [GPAFX]. My cost basis was equal to redemption. Where to invest?
Try one of the Third Avenue Funds.
Question: Are you less positive about Japanese stocks than you used to be?
Not the ones we're in. The verdict is still out on the property and casualty (P&C) insurer companies, but it always was. Of the really large holdings, The Tokio Marine and Fire Insurance Company, Limited [TKIOY] and Toyoda Automatic Loom Works, Ltd. [TYDAF], I feel pretty good about what the management is doing, generally.
Closing Remarks
Sage Host: Thank you for joining us tonight, Mr. Whitman. We appreciate your insights!
It was very nice being with you folks. Good night. |
