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.
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.
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Current performance results may be lower or higher than performance numbers quoted in certain letters to shareholders.