One of Third Avenue Small-Cap Value Fund's recent stock purchases is Imation (IMN), a data storage media company. According to fund management, Imation is misperceived by the market as having low-growth prospects. Writing in the fund's latest quarterly letter to shareholders [.pdf], Curtis Jensen puts forward the case for Imation, the leader in both magnetic tape and recordable optical storage markets:
During 2006-2007, Imation acquired both the TDK and Memorex recording media businesses, with TDK Corporation taking an initial 17% ownership stake and a Board seat. Importantly, these acquisitions were completed on what appear to be sensible, economically attractive terms; add meaningful consolidation to the respective markets; and leave the company’s balance sheet with more than $100 million of cash, net of debt (versus a current market capitalization of $1 billion). Operationally, Imation management, under new leadership, has embarked on a cost cutting drive with respect to both the company’s manufacturing and R&D divisions. Having cut the share price in half during the past 12 months, Mr. Market seems to believe that Imation’s transition toward a leaner, branded consumer products company is doomed to fail. TDK, like us, evidently disagrees, raising its stake to 20% at the end of 2007. Based on the Fund’s cost basis, well below GAAP book value and at single digit multiples of pre-tax earnings, we believe that we have provided for a wide margin of safety and have stacked the odds favorably.