dartmonkey

The 2 big recent phenomena are that it is becoming clear, since November 5, that Canada has some pretty major existential problems. But Canadian companies with a majority of their business activities in the US (like Fairfax) might be expected to fare better. The other thing is, these are results over the last 30 days. We found out Fairfax would not be included in the TSX 60 10 days ago, and that graph is for the last 30 days. If you look at just the last third of the curve, Fairfax is about even, not up. And that is really because FRFHF is down (2-3%), but the Canadian dollar is down about 3%, so the Canadian dollar FFH looks like it's up 2-3%, when it's really just the currency effect. In the end, none of this matters - what's important is earnings earnings earnings, and higher interest rates are going to help Fairfax, along with share repurchases well below intrinsic value and just starting at such a low valuation. The really striking thing is looking at Canadian companies by earnings, and Fairfax jumps from #24 to #11. And on top of that, Fairfax's earnings in the next few years are already locked in, much more reliable than the 4 energy companies in front of them or the 5 banks in front of them. I still feel pretty good about their prospects.

Roughly transcribed: "So it has the utility, to us, of common equity, in terms of what we can do with it. How you value that, in terms of intrinsic value, is up to you." I agree that the 1:1 equivalence with cash would be the upper bound. On the other hand, the value of the insurance business that generates that float could be more than the value of the float, if it has negative cost (i.e. positive underwriting profit, on average.)

Buffett, AR 2018: "Beyond using debt and equity, Berkshire has benefitted in a major way from two less-common sources of corporate funding. The larger is the float I have described. So far, those funds, though they are recorded as a huge net liability on our balance sheet, have been of more utility to us than an equivalent amount of equity. That’s because they have usually been accompanied by underwriting earnings. In effect, we have been paid in most years for holding and using other people’s money." So the float is more valuable than equity if it produces underwriting gains, which of course is typical both of Berkshire and Fairfax.

Minor quibble: float that is not going to disappear may be worth almost as much as its equivalent in cash, but surely never more. If you are FFH and you have $35.1b in float (end of 2023 number) and can invest that float for a good return, it may be worth close to $35.1b in cash, which you might add to its book value, $21.6b, to get $56.7b, divided by 22,891,108 shares outstanding, to get $2477 per share. Updated to Q3, if we still had $35.1b in float (I don't think they report the updated value every quarter), and $22.7b in equity, divided by 21,990,603 shares outstanding, we would get $2628 per share, close to your figure, and even closer if you model in the probable increase in float over 3 quarters which you may have done here. But if Fairfax could magically just keep that $35.1b in funds in perpetuity, with all the concomitant obligations to insured parties waived, that would be even better, right? In other words, a $1m 0% interest loan that is due in 40 years is great, and it's probably worth almost $1m, but certainly not more than $1m. I imagine you might say that it is worth more than $1m if the loan amount keeps increasing over time, but if Fairfax's float is increasing, it is because Fairfax is investing some of its earnings in buying new insurance businesses, or putting new capital into existing businesses, so there would be some double counting there. The other thing that makes float worth a little less than its equivalent in cash, is that, being insurance float, there are some restrictions placed on what that cash can be invested in, meaning it has to be mostly invested in safe bonds. Anyways, by that method #3 metric, it would mean that (22.7+35.1)/22.7= 2.55 would be a P:B ratio that would make FFH fully valued. High enough that we don't have to worry too much about the details, and from today's 1.42 we have lots of room to grow before we get there. And if we get to 2.5, we could alwaysswitch to Method #1

Why would a rational seller accept totally overpriced shares for their company? Only a fool or a BS artist would, and I am not sure that's the type of company FFH would want to buy. It doesn't have to be shares for shares. FFH could perfectly well issue shares and use the cash for an acquisition. If the timing makes it awkward to issue shares, they could even sell swaps, or sell the ones they already have. The point is that they would have access to more liquidity.

I didn't know this. How would we know, has Watsa ever mentioned that? Watsa would certainly seem to have a big advantage on Buffett, when it comes to feeling comfortable with an insurance business in India and its management.

In the hopes of preventing a nasty scuffle breaking out, let me just say that I appreciate both sides of this argument. If FFH were to go to 4x book, I would be selling most of my shares, just because there would be no margin of safety and a high risk of a drawdown. But I would probably still keep some, because I would be quite confident that Fairfax would be able to use those high prices to increase value for ongoing shareholders, by ALSO selling shares but using that cash to invest in assets with a reasonable return. I think having a high P:B ratio would be unarguably good for Fairfax, because of this latter opportunity. It would also be very good for my portfolio, and I would be happy to sell 3/4 of my holdings and lock in that return. The only 2 downsides I can see, is that it would obviously not be good for Fairfax repurchasing shares and keeping the company small - no one should want it to go to $1 trillion like Berkshire. And if Fairfax were to go on to make great returns over the subsequent 10 years, at very high prices, being at 4x would have dumped me out of most of my position, so I wouldn't get all that upside. But if I can get $4000 US per share today, a bird in hand would have compensated me very well for having missed out on x birds in the bush.

I think both views expressed above can be reconciled by differentiating between the short term and the long term. In the short term, the market is a voting machine, and that vote is expressed by supply and demand, with a new demand (like indexers buying 4% of outstanding shares) likely to push the price up. This could be an important consideration for someone who wants to buy new shares or trade around a position. In the long term, the market is a weighing machine, and what counts is primarily sustainable earnings, and secondarily, asset values anchoring the value. If Fairfax continues earning 15% on equity for another 10 years, its price will be about 4 times today's price, and whether or not FFH is in the TSX 60 will be completely irrelevant to that. The focus of long term investors should be on earnings, on new investments and how likely they are to produce future earnings. For a long-term investor, inclusion in the TSX 60 and a subsequent share price increase also has 2 furthert small advantages, IMO: (i) it makes liquidity less of an issue, since FFH adds the option of issuing shares, for instance if they wanted to buy a big Indian bank or reaquire assets from OMERS; (ii) it reinforces Fairfax's visibility and credibility, in Canada and overseas, when it wants to do a big transaction. Admittedly, the lack of inclusion does not seem to be hampering Fairfax at the moment, but index inclusion would just be one more sign that the dark ages of the tech shorts, the Blackberry position, the macro bet on deflation, etc. are behind us and that the new Fairfax is concentrated on insurance and solid investments of the insurance float in sensible businesses.

Above what you had actually said on the main Fairfax topic. Below what is easy to monkey around after looking the result. True, I initially guessed 5% off, on Dec. 2, a week ago ($100), but then on Dec. 6, Friday (at 8:07 PM), I guessed $50. It's off $42 right now, although it got as low as $80 off, so I guess I will go with my Friday pick But it was before looking at the result, which we only got this morning.

That's what I would have said, too. I guessed $50 down today, about 2.5%, and I wouldn't be surprised if that's the lowest it goes. Not enough for me to buy any more, if that turns out to be correct. Of course, the whole market is at nosebleed prices, so if there's a general downturn, FFH will not be exempt. When will the inclusion happen? If FFH being #25 in the list of Canadian companies by market cap is not enough to bump the #112, Algonquin, I can't see why being say #22, if they pass the 3 financials in front of them, would make much of a difference. If they just wait until one of the TSX 60 is bought out, the wait may be a lot longer than next March. So an interesting question might be, what will FFH's rank be when it finally gets included? If FFH's price just follows its growth in book value about 15% every year for the next few years just from earnings accumulation, and if the inclusion happened iin 3 years, it might be up to about #19-20, assuming no major changes in the companies between #24 and #20 (National Bank, Intact, Sun Life, Imperial Oil, Loblaws)...

In previous announcements, when there have been changes both to the Composite and the 60, they have announced both at the same time. So it is safe to conclude that there are no changes to the 60. Now it will be interesting to see if FFH shares drop on Monday. If they do, it will be because some were expecting a bump on the expected inclusion. My guess is we see a $50 drop on Monday. Of course, it doesn't really matter, as others have said, since (a) it will allow for more buybacks and (b) it's just postponing the inevitable. But I tend to agree with those who think a high share price would be / will be a good thing. At current prices that are much higher than a year ago, buybacks are still probably value-enhancing, but they're not the slam dunk they were. And a high price would allow them more flexibility in how they finance things like the anticipated Indian bank acquisition or buying back stakes of companies they have parked with OMERS. In fact, the ideal would be a run-up to 3x book for a while, so they could issue a bunch of shares and reduce their leverage. Or even better, 3x book next year, issue shares, then plunge back to 1x book, buy those shares back, rinse, repeat. The Henry Singleton technique.

Looks like there has been no addition: In past additions to the TSX 60, they say something like this:

I love it when someone has actually looked into this fine level of detail! But yes, it seems the write 5:15 PM on all their press releases, and maybe sometimes something comes up that means it only gets out a few minutes later. https://www.spglobal.com/spdji/en/indices/equity/sp-tsx-60-index/#news-research While we're waiting, who wants to opine on the probability of inclusion? I say 60%. There's no wrong answer, but I'm curious what others think.

Thanks for the links. Siemens AG owns Siemens Project Ventures GmbH (SPV), as nwoodman noted, and SPV, "as part of Siemens Financial Services, operates within a defined strategic framework set by Siemens AG. Its primary role is to invest in infrastructure and energy projects that align with the parent company’s long-term objectives." I don't know why an airport no longer fits the parents' long-term investments, because Siemens certainly is involved with airport logistics (https://www.siemens-logistics.com/en/airport-logistics). But they have held the Bangalore stake since 2001 (Siemens team wins bid to build international airport in Bangalore -(https://web.archive.org/web/20121024213153/http://www.rediff.com/money/2001/nov/01siemen.htm) so after 24+ years, maybe they have just had enough. In 2001, they had 74%, and the two government entities each owned 13%. Now the full 74% stake that Siemens owned originally has been transferred from Siemens to Fairfax (minus the OMERS stake, which they may have some arrangement for taking back some day), 20% of it directly from Siemens this year and last, and the rest from others that Siemens had sold stakes to, GVK and the Zurich Airport authority and perhaps someone else I am forgetting.

Yes, interesting that they sold 10% last year for $250m and a year later they're selling their last 10% for $255m in 3 payments (at close, August 2025 and July 2026), so in effect, selling for less. Hopefully this is because they are refocusing, and not because the airport is actually worth less. Siemens originally had 40%, and had sold 14% to GVK in 2011, before FIH existed, at a valuation of about $1b. A recap of FIH's ownership March 2017 - 38% for $385m (valuation $1b), 33% of which was from GVK (the other 5% from an unnamed seller, maybe Siemens?) https://www.fairfaxindia.ca/press-releases/fairfax-india-and-fairfax-to-acquire-33-of-the-equity-of-bangalore-international-airport-limited-2016-03-28/ July 2017 - 10% for $200m (valuation $2b), also from GVK (their remaining stake), with the price tag justified by FIH because it gave them a controlling stake, 48% (2017 annual report) May 2018 - 6% for $67m (valuation back to $1b) from Siemens, taking Siemens down to 20%, and putting FIH at 54% https://www.fairfaxindia.ca/press-releases/fairfax-india-acquires-an-additional-6-interest-in-bangalore-international-airport-limited-2018-05-16/ September 2021 - FIH sold 5% to OMERS, valuation $2.6b, so we can conclude that they got about $130m for this; they still 'control' 54% but only 'own' 49% https://www.fairfaxindia.ca/press-releases/fairfax-india-completes-sale-of-minority-position-of-anchorage-infrastructure-2021-09-16/ (they say that after this transaction, "Fairfax India’s effective ownership interest in BIAL decreased to approximately 49.0% on a fully-diluted basis, while its actual ownership remained unchanged." June and December 2023 - FIH bought another 10% from Siemens, in 2 tranches, for $250m (valuation $2.5b), so FIH controls 64% and owns 59% https://www.fairfaxindia.ca/press-releases/fairfax-india-completes-acquisition-of-an-additional-7-interest-in-bangalore-international-airport-limited-2023-12-12/ December 2024 - buys Siemens last 10%, $255m but in instalments, valuation a bit less than $2.5b, now control 74% and own 69% https://www.fairfaxindia.ca/press-releases/fairfax-india-to-acquire-an-additional-10-interest-in-bangalore-international-airport-limited-2024-12-03/ So with the exception of the control transaction at a higher price, we can say that the value attributed by management to the airport has gone fromo about $1b, 7 years ago, to $2.5b now. When they explain how it is valued, they say (AR, 2023) that "BIAL is carried on our books at 9.5 times normalized free cash flow, which we consider to be conservative." And in the 2023 Q3 report, they give more detail: "At September 30, 2024 the company estimated the fair value of its investment in BIAL using a discounted cash flow analysis for its four business units based on multi-year free cash flow forecasts with assumed after-tax discount rates ranging from 12.5% to 16.9% and a long term growth rate of 3.5% (December 31, 2023 - 12.4% to 16.9%, and 3.5%, respectively for three business units). At September 30, 2024 free cash flow forecasts were based on EBITDA estimates derived from financial information prepared in the third quarter of 2024 (December 31, 2023 - second quarter of 2023 and fourth quarter of 2022) by BIAL's management." Those are pretty high discount rates - that should mean that the $2.5b valuation we got on this latest 10% is a very good price. But it is a bit hard to see wht has not changed since September 2021, if the story is playing out as we hoped. If the discounted future free cash flow is worth the same now as it was 3 years ago, then that would imply that there has been no growth for the last 3 years, right?