dealraker

In the early 2000's First Union and many other big banks were going around paying 4 times book for community banks earning 10% on equity. They'd flush both the silly price excess and future expenses in a huge one time charge. Thus for years the book value of First Union under Fast Eddie Klutzfield's "Hell, with the accounting we use I can pay 5 x book and make it work" model stayed the same and naive investors favorite metric, sold by all the analysts with obsession...that ROE thingy for these liars went to and stayed 25-28%. Celebrate...celebrate...dance to the music! But the above? Hell, it had already gone on for 10 damn long years and more. The ending of it? Nobody knew for sure, but it was going to come. And today not one Brookfielder will own up to the absolutely brain dead bizarre way the subs, and thus the part owners of the subs, tally up thier stuff. How long can that go? There's not one single person, even those who know it is all made up - not one can tell you within a decade of when it will stop. Same was true when the four of us thoroughly enjoyed the public thrashing and condemnation we got from our "The 12 Ways GE Misleads Investors" stuff. Even today, some 25 years after we began that my cousin CPA says with a smirk (this guy is a brilliant investor but he did lose a whopping $5 mil of family money with Enron), "You didn't prove a thing." He is 100% correct; we proved nothing...absolutely no proof of anything ever with our GE report. And nothing will ever be proven with Brookfield either. Life....ain't it plum unfair and awful? But angst as with Fairfax hovering around book? Can you invest there today and get a return that's almost surely above inflation and above what you'll get with safe fixed? I'd say...."Hmm...seems the probability is about 95%." Do you have to worry about Prem's accounting? Is he out shouting shit like plan value is double of the current stock price? Is he like Welch upon retirement coming on CNBC daily to rant, "17-18 percent with GE as far as I can see" a few days before the largest one-time write down in the insurance business history...followed by 20 plus years of fake accounting coming unglued. And the problem with Fairfax is....??? There is no problem with Fairfax except that you can buy all you want. My morning rant! Have a great day everybody.

I can easlily remember hoping for 8% annual in the brokers thinking inflation would be 5% or less. What happened is something I find almost unbelievable and as I've stated many times before I simply can't fathom why some thing or someone hasn't figured out how to disrupt this profitable industry. And on this topic too I'd like to thank longterminvestor as I sold BRP. It isn't that the stock is down signficantly since I sold as much as I'm just glad I sold the stock. I have far too much $ in the brokers already, I have no idea why I was buying more. BRP is looking relatively cheap - but may deserve it. The others are incredibly expensive.

So if you look at a 10 year chart of AJG you can see that at some point in 2016 the stock price dipped and at that time the PE was half that of today. This year has been to some degree both groundbreaking and eye-opening to me - and I'm being self-depracating here - as I grew up a little (at 69.5 years old) and found that I could sell stocks in the taxable accounts and not literally die....just as Angela had been telling me for years. But me being of the era where and when I grew up, I was sorta stuck in the mud emotionally about it all. But anyway it just seems inevitable that the brokers at some point will have something come from somewhere to make all this storybook fairly tale success blow up pretty bad. I'm 90% plus profit in all of them given they were all 1994 originated so selling isn't a freebee for Angela and me. Life is great...if you can stand it.

As to moats, to me Coke is the typical story. The moat evolves, lessens, and I guess the best word is that it changes. I think Coke has sustained a wide distribution moat while the brand name moat weakened. The distribution moat value isn't the brand one. How they compare to me is complex. But also to me all of it was predictable as to happening over some time period unknown. My wording is oversimplified of course.

Hang around long enough, 1.2 times book is 95% probable in a not too long a time period. But even then I'd take a nap rather than act.

Ole dealraker has, to say the least, teriffically enjoyed the enthusiasm here towards Fairfax. Somehow even while being very right-brained I did get an accounting degree and I have in the past done some extensive financial investigations. Having messed with Fairfax for a long-long time sometimes it becomes depressing to be so isolated in thought, not one single person to share your thinking with. The posts here are delightful for me, all of them...and I mean all! But...over time these extensive endeavors proved as often as not to cost me money rather than make money. Yep, I got so down in the dirt I missed the incredible growth sprouting up all around. And I did it for some time. Investing is a grind. The price of a stock, particularly its price direction and momentum, can have such overwhelming influence on normally rational people's thinking that it makes people raving crazy. And here with Fairfax you can see that ever evolving, a continuous pendulum of emotions, just raw emotions. As was the case with Meta and Facebook, I find it a very productive thing to voice emotions all while acting rationally. I simply could not get enough of Parsad's rational posts on Zuck....all while I blasted my emotions as to his off-the-charts crazy metaverse spending. Given I'm 69.5 years old though, I knew precisely what to do. When most frustrated, when most in doubt, particularly if it is a grand business run by an obsessed and focused winner type....well, just buy the stock. I have hundreds of thousands of profits in Meta from doing that, the anti-emotion pro-rational act. The same is going to be true over time with Fairfax and it is perfectly clear when to buy and when to hold...and maybe even when to sell (no time soon!) as to the stock/known info cycle as it relates to the stock price. There is always the chance something could change with Fairfax. But my view is this possibility is so low that I'll never allow myself to think about it. And for me? That's been three decades of the same thinking. I like being connected to this business and people.

Yes relative to the norm it is expensive and not a buy. But not nearly as expensive as it first appears. Check the cash flow statement.

The moats of these things vary as much as the businesses themselves, but aren't necessarily correlated the same manner. I own a boat load of Mondelez, a business that's done well because of its relatively terrific brands and because of decent management. I never think about Mondelez although it one of my top 8 holdings that make up 90-some percent. But FFH is too one of the top 8 and I never think about it either. I'm not in love with insurance underwriting but I know what I got with Fairfax and think no more deeply about it because thinking will do nothing for me here. Investment decisions? Yea, I know the story and the method with management, I'm ok there. Underwriting? OK on this part too. Structure/culture, well I like this part the best. Men with obsessions who bond as brothers in battle...if they are reasonable men they tend do better than those who come and go depending on pay package. Some of my top 8, now 7, holdings bug the crap out of me, some don't. Norfolk as I've written ad nauseum for one...to stop all things that work while borrowing to buyback to make the CEO's pre-resignation quarter bonus seems just a tad destructive to me. Brookfield? Good riddance and gone! Lowe's...fine, cyclical growth that needs a down cycle - not the end of the world. Markel? Just get frustrated at both the lover-cult that's off the charts irrational and the over-the-top haters. AJ Gallagher...lord, no frustration- I stumbled on the most fabulous business in world history for the small investor, one that still gets zero attention except here at COBF! Berkshire? Pefectly obvious you get what you see and expect the same or a tad less. Just don't go over to the Bloomstran "I make a market using Berk and let me suck you right in with my 5,000 page e-u-p-h-o-r-i-c analysis" rookie investor cult (that will make you as much of a desperate posting idiot as he is and Tilson was). But Fairfax? Ain't it awful to have a buying price on a business you like? Damn, all I can do not to complain about it I guess.

Zero logical motivational reasons for Buffett to do trades for his personal benefit. I don't doubt though that wierd stuff like confusion could crop up at some point in the future. I'm just shy of 70 but my mental declines, even while trying my best and my wife's push to keep me sharp...well declines are perfectly obvious. They show up in places not expected, nearly always that. But even I, at my tiny net worthy compared to Buffett, have zero interest in trades for personal gain for the most part now. I pretty much (again) stay active to be able to stay active, not to gain $.

OK, so as far as predictions as to inflation and whatnot... Greg's test result: 100 Everybody else: 0 (And that's being generous to everybody else, I'm in this group too.) I'm trying to be a tad funny of course, but it ain't far off. Lordy Greg, CNBC guest economist on your radar?

I'm being somewhat silly of course given the history of FFH valuation. To be honest while I didn't understand exactly what Prem and management was up to (and honestly didn't much care either) I not once came close to considering selling the stock. Luckily I'm reading COBF of course as I was distracted. I continually figured a new cycle and new story would come, just no clue when. But being on the forum I got it - the new story - delivered in mass.

You guys have mostly read history and probably done so with some degree of intensity. Ole dealraker who began his working career in 1977 as an insurance and banking analyst (yea "newbie" analyst LOL) has literally experienced it, lived it with his investments! Decades of owning these things that a somewhat smaller group of people find charming to some degree or another. Here's my view (a wild-ass guess of course), I'm a probability type LOL...and this is for let's say the next 3 years: 3% chance Prem and Co get a renewed (from the 1990's) "Buffett of the North" designation...and a 1.7, 1.8...up to 2.5 times or more price to book. A blow up of some other investor obsession could lead to a likely short but euphoric love of Fairfax. Yes people, this stuff does happen. And you, that's none of you, have any chance of predicting it with any degree of success much. 30% chance of sub 8 times earnings price, yes less than book value. Yes, insurance/reinsurance is what it is...a disaster waiting to happen. 67% chance we mess around book or slightly above for some time and go with the flow from here. And believe it or not, not included on this 3-some list above is some sort of pretty serious awful thing that shoves all three above into the trash heap! Yep, that's my guess! What's that worth? Whut ya pay fer it...that's what it is worth!

Morningstar is equally lame on the insurance brokers they cover and this has remained consistent for at least a couple of decades.

Correct.

Same here, with RedLion on the inflate out. Playing "predict" is fun, but few succeed and I'm worse than most. But I do like to play.

What is the chance, the probability, that debt default threats/concerns hit our treasury market sales and pricing in such a manner that all living hell breaks loose? And what happens if that comes?

SD, I laugh out loud when I read this post as I've been right there with you in thought for decades. Of course I'm a part owner of a builders suppy and millwork business, retired contractor (and insuance man), and just bought with others about 500 acres of land. So I go right into the la la land of stupidity as I just invested completely contrary to my themes that that I share with you. Lord help me. And then, some years ago now, Jerry who is the oldest cousin who runs the investment portfolio (3 of us meet and discuss but he makes the final decision) of the above companies (we have a "relatively" huge investment portfolio because we sold 4 builders supply business some 40 years ago and went into stocks) decided in 2009 or 2010 (can't remember) to buy Tractor Supply stock. You can guess...ole dealraker was skeptical but somehow kept my mouth shut while another oblivious cousin (on the 3 person investment "team") said "Go-go-go". And lord help us...we knocked the damn ball so far out of the park with that investment it blows my damn doors off! Tractor Supply stock has fallen some recently, haven't heard a word from Jerry...and I have no idea what to expect if and when I do. But for sure I'm clueless. And as usual I have serious doubts as to this culture of everybody having 5 to 50 acres and a farm and big house with acres to mow while working in some completely irrelated to the farm job. But damn it seems to never end.

Much like those more recent to the themes, the Berkshire/Markel/Fairfax/Brookfield themes do strongly attract one another and a certain type or mindset investor group. It has been this was for decades as I've written here Marshall Johnson of McDaniel Lewis and Co in Greensboro NC had his investors (he was a buy and hold forever analyst broker) also in to things such as NC Railroad (Norfolk Southern's route basically Raleigh to Charlotte NC now fully owned by NC) and First Citizens Bank NC and First Citizens Bank SC. Owners heavily involved and a model of operation different enough that the simple EPS focus doesn't work. One day in the late 1970's Marshall comes in to the office and says, "Charlie, update the First Citizens NC report (we did legal size stock reports on an electric typewriter)...that 'crackerjack' Buffett has just bought a slug of stock from High Point Bank and Trust Co. (Marshall handled that entitiy's trades) at 50% of book." Some 7 or so years later Marshall calls and says, "They own damns and such, less than 10 times earnings." I was on board and this was decades ago. Then this Bruce Flatt guy comes and I decided he ruffled my feathers not by a small amount. The crazy successful outcome made me as uncomfortable as I've ever been holding a stock (we privileged bunch....holding a stock makes us uncomfortable?) and my discomfort (both with Bruce and zero interest rates) increased steadily through the years and in recent times became for me intolerable. I sold the yard sale a few months ago now, my investigation, while limited, suggested something far different than what's presented on Investor Day and Plan Value. Time will tell. Life is great...if you can stand it. Bruce and Warren? Not together for me.

On board for 29 years now...and now my largest holding almost 41%. Wells does a commendable job with the brokers overall. Insurance Brokers Arthur J. Gallagher & Co. (AJG) AJG: Another Consistent Print from Gallagher; Q3 EPS and Conference Call Roundup Our Call AJG reported Q3 EPS of $2.00 beating both our estimate of $1.92 and consensus of $1.96. The upside stemmed $0.04 from Brokerage, $0.01 from Risk Management, and $0.04 from Corporate. Within Brokerage Gallagher saw slightly better organic and margin. Estimates and price target changes: Our 2023, 2024, and 2025 EPS estimates are now $8.80, $10.50, and $11.90, respectively (from $8.71, $10.30, and $11.70). Our estimates reflect slightly better organic growth and EBITDAC margins in Brokerage and Risk Management and stronger investment income. Our price target goes to $266 (from $261), using a 25.0x multiple on our cash EPS plus $3 per share for our clean coal DCF. Stock call: Gallagher shares may not move much on earnings, even with the quarter coming in a bit above their expectations from their September investor day. Nonetheless, we still like the stock here. They continue to see strong organic growth (+9.3% in Brokerage in Q3, with growth expected to approach 9% for the FY and be in the range of 7-9% in 2024), they are expanding their margins, and see an active M&A pipeline. See inside for what AJG is saying on key issues. The good: Brokerage organic growth of 9.3% came in a touch above the 9% expectation due to Reinsurance (+20%) and Global Specialty (+18%) coming in better-than-expected. Risk Management organic was 17.9% also above the 15-16% guide. Further, Gallagher reaffirmed its outlook for both businesses for FY 2023 with Brokerage growth expected to be ~9% and Risk Management above 15%. For 2024 Brokerage organic should be 7-9% with Risk Management at 9-11%. For organic growth by line, see Exhibit 2. The bad: Supplemental and contingents were up 5% in the quarter as they had expected some softness due to the Maui fires, and they also saw an uptick in insurance carrier loss ratios. This was included within the overall 9.3% Brokerage organic growth though. The RPC slowed to 10% from 12% in the Q2, but this isn't necessarily totally bad as Gallagher did say that the numbers would be similar when adjusting for mix, and they are not seeing any meaningful shift in the market. The ugly: There wasn't much to call "ugly", when all segments beat expectations and the company reaffirmed its outlook for 2023/2024. Updated M&A pipeline: They continue to have a healthy pipeline with 45 terms sheets with $450 million of revenue (vs $700M in September) but this is after the Eastern Bank and Cadence deals. Given these deals and depending on timing of future deals Gallagher may issue equity (couple hundred million) to help finance some tuck-in deals before the end of the year. Equity Analyst(s) Elyse Greenspan, CFA Equity Analyst | Wells Fargo Securities, LLC Matthew Byrnes, CFA Associate Equity Analyst | Wells Fargo Securities, LLC Wes Carmichael, CFA Equity Analyst | Wells Fargo Securities, LLC Hristian Getsov Associate Equity Analyst | Wells Fargo Securities, LLC Rating Overweight Ticker AJG Price Target/Prior: $266.00/$261.00 Upside/(Downside) to Target 15.7% Price (10/26/2023) $229.89 52 Week Range $174.43 - 237.95 Shares Outstanding 215,500,000 Market Cap (MM) $49,541 Enterprise Value (MM) $55,029 Average Daily Volume 1,220,473 Average Daily Value (MM) $281 Dividend (NTM) $2.04 Dividend Yield 0.9% Net Debt (MM) - last reported $5,487 ROIC - Current year est. 18% 3 Yr EPS CAGR from current year (unless otherwise noted) 15% $ 2022A 2023E 2023E 2024E 2024E EPS Curr. Prior Curr. Prior Q1 (Mar) 2.81 A 3.03 A NC 3.53 E 3.50E Q2 (Jun) 1.69 A 1.90 A NC 2.35 E 2.29E Q3 (Sep) 1.71 A 2.00 A 1.92E 2.40 E 2.35E Q4 (Dec) 1.54 A 1.88 E 1.86E 2.22 E 2.17E FY 7.74 A 8.80 E 8.71E 10.50 E 10.30E P/E 29.7x 26.1x 21.9x ROIC - Current year est.: Represents return on equity (ROE)EPS: Represents adjusted EPS Source: Company Data, Wells Fargo Securities estimates, and Refinitiv. NA = Not Available, Volatility = Historical trading volatility All estimates/forecasts are as of 10/26/2023 unless otherwise stated. 10/26/2023 21:44:21EDT. Please see page 9 for rating definitions, important disclosures and required analyst certifications. Wells Fargo Securities, LLC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report and investors should consider this report as only a single factor in making their investment decision. Insurance Brokers Equity Research Wells Fargo Express Takeaways Arthur J. Gallagher & Co. (AJG) | Rating: Overweight | Price Target: $266.00 Analyst: Elyse Greenspan Financials FY (Dec) 2022A 2023E 2024E $ ESTIMATES EPS Q1 2.81 A 3.03 A 3.53 E Q2 1.69 A 1.90 A 2.35 E Q3 1.71 A 2.00 A 2.40 E Q4 1.54 A 1.88 E 2.22 E AN 7.74 A 8.80 E 10.50 E Rev. (MM) 8,513.9 A 10,065.2 E 11,630.6 E FCF (MM) 1,942.7 A 771.0 E 2,341.0 E EBIT (MM) 2,096.7 A 2,494.9 E 3,102.2 E EBITDA (MM) 2.69B A 3.22B E 3.80B E Organic Growth (%) 9.7% A 9.1% E 8.0% E WELLS FARGO vs. CONSENSUS Consensus Estimate - 8.76 E 9.95 E Difference from Consensus 0.5% 5.6% VALUATION P/E 29.7x 26.1x 21.9x EV/Revenue 6.5x 5.5x 4.7x EV/FCF 28.3x 71.4x 23.5x FCF Yield 4.7% 1.9% 5.7% EV/EBIT 26.2x 22.1x 17.7x EV/EBITDA 20.4x 17.1x 14.5x EPS: Represents adjusted EPS EBIT (MM): Excludes corporate EBITDA (MM): Excludes corporate Organic Growth (%): Organic growth reflects the brokerage segment only Consensus Estimate: Consensus EPS Estimate; Source: FactSet Source: Company Data, Wells Fargo Securities estimates, and Refinitiv. NA = Not Available, NE = No Estimate Investment Thesis AJG is positioned to show strong organic revenue growth, continues to add bolt-on acquisitions, and is growing its EBITDA. Further, the company should benefit from increased scale in reinsurance following acquiring Willis Re's treaty reinsurance business. Typically, brokers generating the strongest margins have tended to have the highest valuations. As a result, we would expect AJG's valuation to expand to reflect its stronger ongoing margin profile. We have an Overweight rating on the shares. Risk vs. Reward – Upside/Downside Price Target Scenarios $162 $207 $252 $297 $344 Upside Scenario Base Case Downside Scenario * $229.89 $287.00 $266.00 $203.00 *As of 10/26/23 Source: Wells Fargo Securities, LLC estimates and Refinitiv. Base Case | $266.00 • Our price target of $266 is based on the combination of a ~25.0x multiple of our projected 2024 adjusted EPS estimate plus just under $3.00 of value we ascribed to the NPV of its clean coal investments. Our multiple gives AJG a premium to its peers, as the company is reporting strong organic growth, seeing industry-leading margins, and has a healthy M&A pipeline. Upside Scenario | $287.00 • Our upside scenario of $287 is based off of a ~27.0x multiple our projected 2024 adjusted EPS estimate plus just under $3.00 for the company's clean coal investments. • While AJG currently trades at a premium to its peers, if the company can continue to drive strong organic revenue growth and expand margins above peer levels we feel that there is room for additional multiple expansion. Downside Scenario | $203.00 • Our downside scenario of $203 reflects a roughly ~19.0x multiple of our projected 2024 adjusted EPS estimate plus just under $3.00 for the company's clean coal investments. • Our downside case reflects AJG garnering a multiple that is more closely inline with the group average, which we would anticipate should the company's organic growth and margin expansion slow from recent levels. Upcoming Catalysts • December Investor meeting and more detailed 2024 guidance • Monthly pricing surveys • Any change in GDP forecasts • Any additional M&A transactions that are announced Company Description AJG is the third largest insurance broker, with $8.5 billion of revenue from its Brokerage and Risk Management businesses in 2022. The company generates approximately 86% of revenue from its brokerage business (which includes its benefits business), with the remaining roughly 14% from its Risk Management (third party claims payment services) operations. AJG has 33,300 employees and generates 75% of its revenue in the U.S.

And potentially buying JOE at $36 has absolutely nothing to do with house prices falling. My earlier text had nothing to do with prices falling!

So here on the lake where I live the prices haven't subsided one bit according to realtors. Sales? None! Not one single sale on the lake for two months. Oh it gets complex doesn't it?!

I think we are discussing many things at once here. Housing needs are a plenty, maybe even desperate almost, and getting more intense especially where I live. That won't change intermittent cyclical pricing and sales. Been in this business a long long time. Still I look forward to the possibility of adding to JOE. Not only is capitalism via our banking system subject to boom bust, we can participate in the most boom bust sector of all. Early 80's ain't recent, but in my view put 2009 to shame in many ways.

West Center Street Lexington NC builders supply since 1905, the most profitable "independent" builder supply based on profit margin in the southeast. Status: Sales down 30% from one year ago and heading south. The Sunday afternoon sitting on the farmstead porch Sunday afternoon hoisting 2 beers apiece. "Heading down from here...8% ain't gunna work...nothing much over 6 gunna work either." The update!

Although I did buy some tracks of land, one as a half owner the other as 20% owner, I have only watched (instead of participating) a lot of people I know very well - all my first cousins or their children - participate in both commercial and residential real estate. These aren't small players. Here's my summary: The guys - all family to me - putting the deals together whether commercial or residential are fabulously well off, but the residential dealmakers have done better by a significant amount. The people - all family to me - investing in the endless number of deals the above have orchestrated have varied results. The commercial investors have had some successes but some blowout losses too. Overall nowhere as good as an index fund. The residential investors have far better results with only a couple of wipe outs. I've been typing for years that Bruce Flatt's skill is marketing and fees, not buying assets, without success of persuasion. I've enjoyed my failure some...and glad not to ever be a Brookfield investor ever again, win or lose...I could care less.

Up until Ben B I did not believe that the fed turbo charged our already boom-bust natured economy. But I am now a full believer in that it seems we waffle back and forth between excessive fear of ANY type downturn to near "destruct-all" behavior. I think at least some period of US debt default fear with all the obvious players likely to participate in that is almost inevitable.