FPA Paramount Fund Q2 shareholder letter below.
This quarter we’d like to discuss some stocks we’ve recently sold and the reasons why. Not surprisingly, since intelligent use of cash flow is an important criterion in deciding to buy shares in a company, a disappointment in this area, or a change of policy or objective, can often be the catalyst in developing a decision to dispose of one of our portfolio holdings.
One of the challenges that Actuant Corporation (NYSE:ATU) has faced deploying its capital into attractive deals is that its high-return, strong-market-share business segments, Industrial and Energy, which can boast of operating margins over 20%, even 30% in some cases, have not produced a plethora of bolt-on deals which could have permitted Actuant to deploy capital in familiar businesses and at attractive margins.
Unfortunately, instead of waiting patiently for the right opportunity to come along to spend its accumulating cash, Actuant Corporation (NYSE:ATU)’s response to this dearth of desirable deals was to pursue several large acquisitions in the less exciting parts of its business, most significantly in Electrical. It acquired Mastervolt in November 2010 – the cost, $150 million, or 1.4x sales.
Mastervolt makes specialty electrical products for the marine and European solar markets. Marine, the smaller and less important market, has a pretty good fit with some existing Actuant businesses, but this cannot be said of the Mastervolt solar business. The European solar market is almost completely dependent on government tax subsidy. Periodic changes or even elimination of these subsidies wreak havoc with industry participants as volumes, prices, inventories, etc. move around in an unpredictable fashion.
This certainly has been the case in recent years, and it has become clear that Actuant Corporation (NYSE:ATU) paid well in excess of fair market value for Mastervolt. In June of 2013, Actuant confirmed this by announcing that it would divest its entire electrical segment, and would record a non-cash after-tax charge of $150 million. Actuant had owned Mastervolt for just 2 ½ years.