This post has been excerpted from a letter by Chip Rewey, Lead Portfolio Manager of the Third Avenue Small-Cap Value Fund.
Horizon Global designs and manufactures towing, trailering and cargo products for both commercial and recreational uses. It is the only public company in this niche market and looks to have the largest market share. All of Horizon’s competitors are private companies and they only target segments of the business. The company was a public spin-off of TriMas Corporation’s Cequent business and renamed Horizon Global Corporation in June 30, 2015.
Through acquisitions, Horizon has evolved from an aftermarket hitch manufacturer to a company with a diverse portfolio of products across different brands that serves the DIY market (through e-commerce on Amazon.com and etrailer.com, which account for about 30% of sales), aftermarket and private labels through resellers (U-haul, LKQ, Autozone, Walmart, Home Depot, which account for about 40% of sales), and now Original Equipment Manufacturers/OEM (Ford, Toyota, GM, which account for about 30% of sales). About half of Horizon products are used in commercial applications such as construction, marine, military, mining, and municipalities. The rest are for recreational uses including boat towing, power sports, horse/livestock, RVs, and truck accessories.
We like Horizon’s market position. It operates in a niche market and has a unique product portfolio that discourages new entrants but at the same time allows it to capitalize on its brands to gain share. Towing equipment is custom-engineered for each vehicle model and for each specific application. While the DIY and aftermarket are more price sensitive, OEM products have to blend in with the vehicle esthetic and mechanical designs. To succeed, the company has to have design skills, product safety record, efficient skills in short run production, and a strong balance sheet to handle large but slow moving inventory. While this is a slow growth business, management has been taking steps to consolidate plants and improve productivity. EBITDA margins already expanded from 4.5% in 2013 to 8.5% in 2016. The company’s goal is to continue to improve it to 12-13%. We feel that these goals are achievable due to their self-help nature. It is not difficult for us to see the stock reaching $18-20 a share from $14 currently.
IMPORTANT INFORMATION
This publication does not constitute an offer or solicitation of any transaction in any securities. Any recommendation contained herein may not be suitable for all investors. Information contained in this publication has been obtained from sources we believe to be reliable, but cannot be guaranteed.
The information in this portfolio manager letter represents the opinions of the portfolio manager(s) and is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed are those of the portfolio manager(s) and may differ from those of other portfolio managers or of the firm as a whole. Also, please note that any discussion of the Fund’s holdings, the Fund’s performance, and the portfolio manager(s) views are as of June 30, 2017 (except as otherwise stated), and are subject to change without notice. Certain information contained in this letter constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof (such as “may not,” “should not,” “are not expected to,” etc.) or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of any fund may differ materially from those reflected or contemplated in any such forward-looking statement. Current performance results may be lower or higher than performance numbers quoted in certain letters to shareholders.
Date of first use of portfolio manager commentary: July 17, 2017.
Past performance is no guarantee of future results; returns include reinvestment of all distributions. The above represents past performance and current performance may be lower or higher than performance quoted above. Investment return and principal value fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. For the most recent month-end performance, please visit the Fund’s website at www.thirdave.com. The gross expense ratio for the fund’s institutional and investor share classes is 1.40% and 1.65%, respectively, as of March 1, 2017. Please be aware that foreign securities from a particular country may be subject to currency fluctuations and controls, or adverse political, social, economic or other developments that are unique to that particular country or region. Therefore, the prices of foreign securities in particular countries or regions may, at times, move in a different direction than those of U.S. securities. Prospectuses contain more complete information on management fees, distribution charges, and other expenses.
Third Avenue Funds are offered by prospectus only. The prospectus contains important information, including investment objectives, risks, advisory fees and expenses. Please read the prospectus carefully before investing in the Funds. Investment return and principal value fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. For updated information or a copy of our prospectus, please call 1-800-443-1021 or go to our web site at www.thirdave.com. Distributor of Third Avenue Funds: Foreside Fund Services, LLC.
Current performance results may be lower or higher than performance numbers quoted in certain letters to shareholders.
About The Author: Chip Rewey
Mr. Rewey is the leader of Third Avenue’s Value and Small-Cap Teams, serving as the Lead Portfolio Manager for the Third Avenue Value and Small-Cap Funds. Mr. Rewey joined Third Avenue Management in 2014.
Before he joined Third Avenue, Mr. Rewey spent more than ten years at Cramer Rosenthal McGlynn, LLC as a Senior Vice President and Senior Portfolio Manager where he oversaw the firm’s smid, mid, large and all cap investment strategies. Prior to Cramer Rosenthal McGlynn, Mr. Rewey was a Senior Portfolio Manager at Sloate Weissman Murray & Company, where he worked directly with the Founder on research and portfolio construction. Mr. Rewey began his career as an Acquisitions Analyst for Associates Corporation of North America before moving on to roles at Oak Value Capital Management and Smith Barney, Inc.
Mr. Rewey earned an M.B.A. in Finance from Duke University Fuqua School of Business and holds a B.S. in Finance from Boston College, graduating Magna Cum Laude. He is a member of the New York Society of Security Analysts.
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