The Gabelli Value 25 Fund Inc.’s letter to shareholders for the first quarter ended March 31, 2015.
To Our Shareholders,
For the quarter ended March 31, 2015, the net asset value (“NAV”) per Class A Share of The Gabelli Value 25 Fund Inc. increased 0.6% compared with increases of 1.0% and 0.3% for the Standard & Poor’s (“S&P”) 500 Index and the Dow Jones Industrial Average, respectively. See page 2 for additional performance information.
Gabelli Value 25 Fund: Commentary
In a somewhat volatile quarter, with both macro and company specific headlines affecting stock prices, the market rose marginally. In January, the Swiss National Bank discontinued its minimum exchange rate peg of CHF 1.20 per euro, and later that month the European Central Bank announced that it was expanding its asset purchase program to include bonds issued by euro-area central governments, agencies, and European institutions. The combined effect of these two events led the U.S. dollar to substantially strengthen against the euro, going from $1.21 at the end of 2014 to $1.08 at the end of March. This dynamic will create a meaningful currency headwind for U.S. based multinationals with exposure to the eurozone and with currencies that have fallen against the dollar, such as Great Britain, Russia, and Latin American currencies. At the same time, the U.S. economy continued to strengthen, with GDP growth of 2.4% in 2014 and unemployment declining to 5.5%. Many large U.S. employers, including McDonald’s and Walmart, announced wage increases, boding well for consumer purchasing power but at the same time raising concerns about eventual inflation.
Several holdings in the Fund made progress with financial engineering transactions that we believe will benefit shareholders. Madison Square Garden (3.3% of net assets as of March 31, 2015) provided further details on the planned spin-off of its Sports and Entertainment businesses from Media Networks, which we believe will help to surface value in both entities. Additionally, Energizer Holdings (1.6%) attended the Consumer Analyst Group of New York conference, with management teams presenting from its Energizer battery business as well as its newly named Edgewell Personal Care business, with brands including Schick razors, Edge shaving products, Hawaiian Tropic, Banana Boat sun care products, and Playtex feminine and baby care products.
Gabelli Value 25 Fund: Deals, Deals and More Deals
Along with financial engineering, the “Fifth Wave” of mergers and acquisitions (M&A) activity continued to build during the quarter. In the first quarter, worldwide M&A increased 25% year over year to $854.2 billion, making it the strongest first quarter for M&A since 2007. In the U.S., deal activity totaled $415.9 billion, an increase of 33% compared to Q1 2014, and the best Q1 for deal making in fifteen years. This M&A wave continues to be global in nature, with cross border M&A totaling $267 billion in the quarter, a 10% increase over Q1 2014 and comprising 31% of total M&A.
In February, Exelis Inc. (0.5%) announced it agreed to be acquired by Harris Corp. for $23.75 per share in cash and stock. Exelis shareholders will receive $16.625 in cash and 0.1025 of a share of Harris common stock. Upon closing, Harris shareholders will own approximately 85 percent of the combined company, and Exelis shareholders will own approximately 15 percent. On a pro forma basis, the combined company will generate more than $8 billion in revenue.
Gabelli Value 25 Fund: Let’s Talk Stocks
The following are stock specifics on selected holdings of our Fund. Favorable earnings prospects do not necessarily translate into higher stock prices, but they do express a positive trend that we believe will develop over time. Individual securities mentioned are not necessarily representative of the entire portfolio. For the following holdings, the share prices are listed first in United States dollars (USD) and second in the local currency, where applicable, and are presented as of March 31, 2015.
CBS Corp. (4.8% of net assets as of March 31, 2015) ($61.63) operates the CBS television network and the premium cable network Showtime, and it owns twenty-nine local television stations and 130 radio stations. We believe that CBS has a number of opportunities to generate incremental non-advertising revenue from the sale of existing content to online video distributors and the retransmission of content agreements with traditional distributors. In addition, we expect a continued recovery in advertising to contribute to earnings growth. Finally, we believe that financial engineering, including the announced $3 billion share buyback, could act as a catalyst for shares.
DISH Network Corp. (1.4%) ($70.06) is the third largest pay television provider in the U.S., with approximately 14 million subscribers. As a satellite operator unburdened by local franchising requirements and wired plants, DISH can market and deliver video extremely efficiently across the entire country. As founder of the company, Charlie Ergen owns approximately 53% of the company’s shares and lends his strategic vision to its benefit. DISH has accumulated a significant spectrum position at attractive prices, and unsuccessfully attempted to enter the mobility market via the acquisition of Sprint. DISH could monetize its spectrum through a sale of the spectrum or the whole company, or (more likely) a partnership with an existing wireless operator.
Grupo Televisa SAB (1.3%) ($33.01) is the dominant company in the Mexican broadcast television industry. Televisa has parlayed its vertical integration and strong broadcasting cash flow into a significant position in Mexican satellite and cable television. In an important recent trend, Televisa solidified its position as a key program supplier to Los Angeles based Univision, the dominant Hispanic television provider in the U.S. With the results of the 2010 census now well distributed, the growth of the U.S. Hispanic population virtually assures higher cash flow from this partnership to Televisa and makes it likely that investors may accord this business a higher multiple, as advertisers value eyeballs greatly. Televisa has an opportunity to monetize this investment, as Univision is likely to get sold or to conduct an initial public offering in late 2015.
Honeywell International Inc. (3.1%) ($104.31) operates as a diversified technology company with highly engineered products, including turbine propulsion engines, auxiliary power units, turbochargers, brake pads, environmental and combustion controls, sensors, security and life safety products, resins and chemicals, nuclear services, and process technology for the petrochemical and refining industries. One of the key drivers of HON’s growth is that the company is constantly developing new products and services for the marketplace. One new product the company has developed is Solstice. Solstice is a fluorocarbon with zero depleting ozone qualities and negligible impact on global warming. The product will be used in various aerosol applications and in the air conditioning systems of vehicles. Driven by consumer demand and European Union regulation, demand for Solstice is expected to increase significantly. A new service the company is providing is connectivity in airplanes, and in residential, commercial, and industrial buildings. In the airplanes, HON has products across the entire connectivity chain, from hardware to apps and data services, which will provide high speed Internet service. In buildings, the company has a large installed base of devices, including security and fire systems, room controls, and smoke detectors that can be connected with smart devices to increase productivity, efficiency, and safety. These products and services should continue to drive HON’s future earnings higher.