Zorrofan
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Posts posted by Zorrofan
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Assets
Cash of $40.4 million at March 31, 2015 included Indian rupees of $29.4 million (INR 1.8 billion), with the remainder denominated in U.S. dollars.
The company's investments totaled $976.8 million at March 31, 2015, and was comprised of U.S. treasury bills of $269.4 million, Indian corporate bonds of $633.5 million (INR 39.6 billion), Government of India bonds of $24.1 million (INR 1.5 billion) and investment funds of $49.8 million.
Interest receivable of $8.0 million at March 31, 2015 principally related to accrued interest on the company's bond portfolio.
Deferred income taxes of $1.8 million at March 31, 2015 primarily reflected operating losses for tax purposes that arose in the first quarter of 2015 because the company computes its corporate income tax liability in Canadian dollars pursuant to the requirements of Canadian taxation authorities, whereas the functional currency of the company is the U.S. dollar. The company has not recorded deferred tax assets of approximately $6.6 million primarily related to costs of the offerings.
Cheers,
Gio
Thanks for posting this! I am excited to see what Prem can do with this as India may be the most exciting place to invest in the next few years.....
cheers
Zorro
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I'm no expert when it comes to deflation but I don't understand why you would bet on it happening to a great extent. The definition of deflation is if prices drop, people will stop buying, as they will see that prices will be lower in the future and thus delay purchases. But do consumers think this way? No. Who here has ever delayed a purchase because they think prices will be cheaper tomorrow?
I never have. For example, if you're hungry and in a grocery store and want to buy a sandwich, would you say, I'm not buying this because it will be cheaper tomorrow? Nobody would do that.
People buy cars, washing machines, refrigerators, computers, iphones, clothing, shoes because their existing ones have worn out. They don't sit around like economists and make predictions about the prices of products. The avg. consumers has no idea where prices are trending.
Also, the world's population is still growing, so wouldn't there be more demand for products thus, increasing prices? Why would prices go down if the population is growing? Doesn't make much sense to me.
Just think about the computer business. How much did a computer cost in 1985? I don't have exact $ amounts in front of me but I would guess it was a few thousand. That computer was crap compared to a laptop today which you can buy for $500. A million times faster than the computer we all bought in 1985. Who in 1985 said, I'm not buying a computer for $2000 today, when I can wait until 1990 and buy one that is way faster and for half the price? Nobody does that because consumers don't think that way.
The PC market today is mature and prices are flat. How much lower can you go for a $500 laptop? Again, who here will delay purchasing a computer because I thought, well, if I wait another year, prices will be lower and the features will be better! Even though I know this would be the case.
Same thing with a video game system. I bought Nitendo, sega, playstation, and xbox growing up as a kid. Who here knows anybody that didn't buy a console because the next one would be cheaper and way better than the current system? Again. I know this is the case but it doesn't make me not purchase today's new console.
Maybe I'm wrong but betting on deflation happening to a great extent doesn't make much sense to me.
50cent
Take a look at Japan's 20 year struggle with deflation...people put off purchases all the time if they think something will be cheaper later. Food? no, of course not. But larger purchases yes....and Prem is betting that deflation will be a problem as well.
cheers
Zorro
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Now, time to speculate what Prem will do with the ~$325M USD that he'll be getting out of it....
Buy back some Brit from OMERS? ;)
Actually given how well the company has done, I wish he had put more money into it and expanded.....we need to stop selling off all these little gems and grow them, in BRK like fashion.....
my $0.02
cheers
Zorro
That assumes that incremental capital can be put to work in the business at good returns. That is not always the case.
You are correct, and that was my assumption. My continuing hope is that FFH continues to follow WEB into buying and holding great companies forever.....
cheers
Zorro
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Now, time to speculate what Prem will do with the ~$325M USD that he'll be getting out of it....
Buy back some Brit from OMERS? ;)
Actually given how well the company has done, I wish he had put more money into it and expanded.....we need to stop selling off all these little gems and grow them, in BRK like fashion.....
my $0.02
cheers
Zorro
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Hi Zorrofan - I sold KMI to raise cash for purchasing during the downturn that I've been expecting but never seems to arrive. I still like KMI and will likely buy it back in the event it move below my sell price.
Thanks,
Lance
Lance,
thanks for your reply - if it is any consolation I've been raising cash too but I am starting to wonder if the FED will ever let the market correct....
cheers
Zorro
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Lance,
As a holder of KMI I am curious why you sold? My feeling is Rich Kinder will use the current turmoil to add assets at attractive prices but I am always looking for the flaw in my reasoning. If you don't mind sharing why you sold?
thanks
Zorro
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I need some further clarification here. FFH believes that under their leadership (clout/connections/etc.) they will be able to run BRIT better than when it was public, hence why they purchased it (esp at 1.5x book). If this is the case, they will be adding value to the 29% owned by OMERS and will have to pay even more in the future. Why would they not purchase outright and issue additional FFH shares, then buy back shares with the profits from Brit? (FFH is trading at 1.5x BV)
My guess is that Prem wants to keep dilution at a minimum and will pay for the remaining 29.9% out of profits from BRIT......
cheers
Zorro
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A bit more info.....
Is FFH looking to OMERS as a partner much like BRK and 3G?? Not that OMERs would run it but they could be a source of funds like BRK is to 3G.......
cheers
Zorro
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The reason I ask is the carry reduces the rate of return significantly even to the point of making the investment less than the index over almost all time periods if the investment fund returns have no carry associated with them.
Packer
MKL invested in this fund too, they would pay the same fees no? So I can't see them being willing to under-perform the index. Or am I missing something??
cheers
Zorro
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I really took this to heart: never argue with stupid people, they will drag you down to their level and beat you with experience, mark twain.
But it is so hard to do!
+1
love it.....
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Their cost basis is way below today's price. They will earn higher returns than KRFT shareholders.
i realize that however there is the opportunity cost of not redeploying your capital, which is what original mungerville was referring to. WEB also added $5 billion for this deal. I am simply saying that I am fairly confident that this will grow more than many seem to be expecting. I could be wrong but only time will tell...
cheers
Zorro
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Sure management is worth a premium and over time they would likely do another combination - but this would not occur for a couple years, but a 22x-24x multiple should already include that.
In terms of low-balling. They are stating $1.5 billion in cost savings, plus I estimated 200-300 million interest savings on the refi of $9 debt to investment grade, plus redeeming the Berkshire preferred of $8 billion (about $500 million).
That's a total cash flow/EBITDA savings of $2.2 billion or roughly a quarter of the forecast $10 billion in EBITDA (although the preferred redemption doesn't fit nicely into EBITDA savings more EPS, but anyway). So even if 3G gets cost savings of $2.5 billion instead of $1.5 billion (which I think every analyst would agree would be very aggressive), that would only move the needle on the $10 billion by 10% which may translate into EPS of 15% more.
Its just really hard to move the needle unless they 1) do another merger, or 2) begin a very significant international expansion in relatively short order.
Having said all this, relative to the average stock in the S&P 500 which is at very elevated levels, I agree that the less cyclical nature of Kraft-Heinz earnings combined with the potential for future growth should lead to outperformance. But to be clear, that isn't saying that much because the S&P 500 probably will grow less than 5% annually over the next 10 years.
IMO this is a stock with a muted downside and potential for positive upside surprises. Not in a hurry to sell, but would if a better idea came along. Why go to cash when you could earn 7-10% a year in a stock that will likely be a buffer in a down market?
I don't disagree - this is why I bought in the first place. However, you could buy Berkshire which has more diversification and do the same return. My main point is that I wouldn't get too excited about this thing at this valuation.
You raise some very good points but at the same time I find it hard to believe that 3G and WEB are doing this to earn 5% to 7% over the next 5 years......
cheers
Zorro
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I can understand that there is some premium (3-5%) because its hard to invest yourself in india without being an indian person yourself, but a premium for public stock holdings?
For me this sounds like wishful thinking and FFI looks at the moment like a hyped investment that comes down to NAV when the first official report is public.
Not to worry, I bought a very modest amount today, therefore the price should drop by Monday at the latest.....your welcome
cheers
Zorro
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So we have the cost cutting
Does the $1.5B in synergies include the benefit from refinancing high yield debt and BRK preferred?
From my understanding the savings from refinancing are in addition to the $1.5B in synergies, but i could be wrong. My guess is 3G beats that figure either way.....
cheers
Zorro
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what's up with the share price today? it is a pretty hefty premium at this point!
cheers
Zorro
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This might be a cheap source of funding for another acquisition in Europe??
cheers
Zorro
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Regardless of whether or not Buffett stays, Berkshire is getting close to (what appears to be) a size where it can no longer retain all of its earnings. I mean, if you just think mathematically, if BRK grew at 10% a year, it would be something like a $1.5 trillion market value company in 15 years. That certainly isn't impossible, after all Apple is a single business and could reach $1T in market cap, but my guess is that it isn't long before a dividend or share buyback are instituted regularly. If so, it seems to me that the role of capital allocation at Berkshire will become *slightly* less important in its overall performance, with most of the performance differential vs. the market relying on how Berkshire's wholly-owned businesses perform versus the market. And thus, I'd expect that the incremental advantage in capital allocation that Buffett's talents provide may be reduced going forward, reducing the impact that his leaving has on future performance. The wild card is whether or not selling a whole business to Berkshire is still attractive after Buffett leaves; my guess is that as long as the acquisition philosophy remains the same, Berkshire will remain a good place to sell for certain owners versus alternatives (private equity, public markets, etc).
Basically, my point is, if we were investing in a $50M stock fund, I'd pay a sizeable premium for Buffett to manage it over almost anyone else. But Berkshire is so far removed from that that I'm not sure how much Buffett is really worth these days over another capable person who believes in the same basic capital allocation principles. Could be totally off base but my two cents.
I do believe that WEB has stated that in ten to twenty years BRK will be paying a dividend. Not sure if that was on CNBC or in the letter this year......
cheers
Zorro
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After observing Fairfax for 13 years, I realized that they are not very good at stocks, but they made most of their money from bonds. Fairfax is first an investment company, then an OK insurance company (cost 2% a year for float if I remember correctly). Fairfax just can not underwrite like Lancashire or RNR. It is not their culture and they just can never get to that level of underwriting. When next hurricane or big events hit, I bet Fairfax will need to separate normal underwriting and Big Cat loss again. So Fairfax has to hedge all the time to protect the company. Well, the hedge was supposed to protect their stock holdings, so why Fairfax sold Johnson & Johnson (Prem said JNJ is long term investment) then? So what those hedges protect if they sold their only long term stock holding?
I think there is something wrong with Fairfax's business model. Those hedges are not free and it costs money, sometimes lots of money. If Fairfax can not underwrite for profit in the long run (overall have not achieved that since 1985), then Prem has to buy lots of hedges to protect the company from going under.
Last year was the year that all stars were aligned to make big profit for FFH: no big hurricane, interest rate went lower so bonds made money, stock market was good, so FFH made a good profit last year, but I do not expect them to repeat that easily. With the current business model, I do not think FFH can achieve their 15% target in the long run. Last year, someone did calculation, FFH has not achieved that goal for the last 5 years, 10 years and 15 years!
Uh....the combined ratio was 90.8 in 2014 versus 92.7 last year, so they actually had an underwriting profit. As far as stock picking goes, they have averaged stock returns something like twice the S & P over the last 15 years or so.......i'm a bit confused by your comments
cheers
Zorro
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Sad news. He seemed like such a smart and decent man, and he did great things for AIG and it's employees, customers, and shareholders.
I'll be so happy when we can finally defeat all types of cancers...
could not have said it better.....RIP
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Even the U.S. is expected to see nominal, headline CPI deflation in 2015 - largely due to lower energy costs and how that flows through to most goods produced. Just as a quick summary of what we need to see for these to be profitable.
As of 9/30/2014
U.S. EUR UK FRANCE
Weighted Strike price 232.19 111.24 243.82 123.85
Nominal (in billions 52.75 36.775 3.3 2.75
Current CPI 238.03 117.43 257.6 124.85
Delta to breakeven -2.45% -5.27% -5.35% -0.80%
Thanks for the breakeven maths. Don't forget, though, that these are saleable securities. We need a deflation scare, in which people are prepared to pay silly money to buy protection off Watsa, more than we need deflation.
China's currency is pegged to the US dollar, which has been rising. This results in a rising Yuan versus other Asian currencies. If China decides to loosen the peg or outright devalue we could see some serious deflation.....thoughts?
cheers
Zorro
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I read this in a recent Seeking Alpha article on the deflation trap southern European countries like italy find themselves in
"For Italy it is slow torture. Contractionary policies have already pushed the debt ratio from 116pc to 133pc of GDP in three years. Each one percentage point fall in Italian inflation forces the country to increase the primary surplus by 1.4pc of GDP to meet EMU rules, according to the Bruegel think-tank in Brussels. Yet to act on this imperative is to thrust the economy further into a self-reinforcing downward slide."
First we had Japan begin the process of devaluation, we now have a muted attempt in Europe (how far will Germany let Mario go?), can China and the rest of Asia be far behind? As someone who actually lives in Italy it would be interesting to get Gio's thoughts on the situation in Italy. Does the whole world have 20 years of "Japan" to look forward to??
cheers
Zorro
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I didn’t expect Brindle’s sudden departure from Lancashire… I was utterly unprepared and had to accept a (meaningful) permanent loss of capital.
On the other hand, I got lucky with Altius, and exited my position before the stock price fell. (I still like Altius business model, and I think they will do fine over time).
Cheers,
Gio
Gio,
Why do you think Lancashire is so "Brindle" dependent? Surely the management team even ex-Brindle is still very good and should do well once the cycle turns??
Look forward to your thoughts...
cheers
Zorro
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Merry Christmas, Happy Hanuka, or for those inclined have a festive non-denominational holiday occasion
"Macro" Musings
in General Discussion
Posted
My fear is that the FED will intervene.....IMHO its FED intervention that will in the long run create much bigger problems than allowing a decent sized correction would.
cheers
Zorro