07 Nov 2011 Meridian Funds - Q3 2011 Commentary ( Portfolio )
Our investment strategy remains unchanged. We continue to seek out-of-favor companies exemplified by an extended period of declining earnings. In recent years most earnings problems have been related to poor economic conditions. With some stability in the economy, albeit tenuous, we now see more companies that meet our strategy for company-specific reasons. These investments are the traditional strength and point of differentiation of the Meridian Value Fund. We are gradually shifting the portfolio to more of these investments and expect that this should bode well for a return to the Fund’s historically strong performance levels. We hold 53 positions, representing 34 industry groups. We continue to invest in companies of all market capitalizations and our largest areas of concentration are technology, retail and transportation.

During the quarter we purchased shares of Denny’s Corp. We sold our positions in Curtis-Wright Corp. and Nalco Holding Co.

LKQ Corporation is one of our largest holdings. The company is the leader in the alternative auto parts market. This market consists of recycled auto parts that have been salvaged from wrecks and aftermarket parts that are produced as private label alternatives to original manufactured parts. These parts are sold to mechanics and body shops at a 20 - 50% discount to dealer prices. Barriers to entry are high as it is unlikely that any company will replicate LKQ’s network of over 400 dismantling and distribution facilities. Earnings declined with lower auto repair volumes because of a decline in miles driven first due to high gas prices then by the economic downturn, combined with a steep decline in the price of scrap metal which is a by-product of the parts recycling process. Earnings growth resumed late in 2009 and continues to grow, driven by increased penetration of alternative parts as insurance companies and consumers seek to save money, along with market share gains against smaller competitors and through accretive acquisitions. We believe LKQ can perform well in challenging economic conditions and the valuation is reasonable on normalized earnings which we estimate could exceed $2.50 per share in the next 3 to 5 years.