Broad Run 4Q17 Letter – American Woodmark Corp, 21st Century Fox

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Broad Run Investment Management Fourth Quarter 2017, January 22, 2018

  • Returned 20.2% net of fees in 2017 compared to 21.1% for Russell 3000
  • In 2017, our businesses made good fundamental progress. In aggregate, they grew EPS 11% and paid a 1% dividend
  • At year-end, portfolio is trading 16.6x our estimate of 2018 EPS, which assumes about 25% EPS growth, 17% due to fundamental business performance and 8% due to the Tax Cuts and Jobs Act of 2017
  • Despite significant market appreciation since the recession, our estimate of the valuation and growth for these businesses remains largely in line with historical levels, giving us a favorable long-term investment outlook

American Woodmark Corp (AMWD)

  • Leading manufacturer of kitchen and bath cabinetry for remodeling and new home construction
  • During 4Q, announced the acquisition of RSI Home Products (RSI) for approximately $1.1Bn, nearly doubling AMWD’s EBITDA
  • RSI is highly profitable, and enjoys a leading position serving the entry-level cabinet market
  • AMWD’s strength is serving the mid-level of the market, so RSI’s products are highly complementary. In addition, has a unique distribution and installation program that is very popular with homebuilders and other customers
  • AMWD plans to extend this capability to RSI, opening up significant opportunity to cross-sell RSI products to existing customers to gain wallet share
  • Believe this transaction, combined with the already attractive company specific initiatives at AMWD, and the continued cyclical rebound in the homebuilding and remodeling markets, positions the company to compound at a very attractive rate for many years to come

21st Century Fox (FOX / FOXA)

  • Media conglomerate with leading positions in cable networks (Fox News, FX, National Geographic, Fox Sports, RSNs), broadcast television (Fox), movie and television studios, Hulu, and international media platforms (SKY, STAR India, etc)
  • Fox struck a deal to sell the majority of its assets to Disney in a nearly $70Bn transaction. Believe this is a financially and strategically attractive transaction for Fox, with the company getting full price for the assets it is selling to Disney, and retaining assets that are among the most differentiated and fastest growing in the traditional media space (Fox News, Fox Sports, Fox Broadcast)
  • This transaction will involve significant regulatory scrutiny, and it is far from certain the deal will be allowed to close in its proposed form. That said, we believe the antitrust concerns are manageable and the transaction will eventually clear
  • We view Fox as undervalued based upon the market price of Disney shares to be received, the value of the Fox assets that will remain, and the probability of the deal closing

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