KPO
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Posts posted by KPO
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2 hours ago, Viking said:
KPO, a solid case can be made that shares are much ‘cheaper’ today than when Prem bought in June 2020.
Fairfax stock price: Prem’s = US$308; today = $413; increase = +$105
Book value March 31 ‘20 = $422; Q2 ‘21 = $540; BV increase = +$118
So just looking at BV it kind of looks close (stock is just as undervalued today as it was when Prem bought).
But BV does not capture what happens in the Investment in Associates bucket (this does not capture the undervaluation of Fairfax India). The fair value of this ‘bucket’ of stocks was minus $1.1 billion in Q1 ‘20 (to its carrying value). However, in Q2 ‘21 it was plus $900 million. The fair value of this bucket of stocks went up by $2 billion in the past 5 quarters or $77/share. Cha ching!
So if you add $75/share to the increase in BV you get an improvement of $193/share. With the stock up only $105. This heavily tilts the argument that shares are cheaper today.
And how have the insurance businesses performed over the past 5 quarters? Does that matter? Hell yes, it matters:
- hard market in insurance has been confirmed over the past 5 quarters with net written premiums growing in the more than 20%. Investment float has grown by 15% year over year. And CR has come down to the 95% range which is an improvement from where it was pre-covid.
Bottom line, Fairfax’s insurance businesses are more valuable today than they were when Prem bought his shares last year.
Has Fairfax done anything else to improve the value of its business over the past 5 quarters? Yup:
- taken advantage of crazy low rates: refinanced a large chunk of debt at lower rates which lowers interest costs in future years
- deleveraged/paid off line of credit - using proceeds from $700 million Riverstone sale
- Blackberry warrants were renewed with conversion price dropped from $10 to $6. Holy shit batman!
- Fairfax Africa was merged into Helios; Farmers Edge and Boat Rocker completed large IPO’s; sale of Toy’s ‘R Us retail business.
- Resolute, Stelco and Fairfax India all completed large share repurchases. As a result Fairfax now owns more of these three businesses than it did 5 quarters ago.
- invested C$100 million in Foran Mining
- ownership of Eurolife increased from 50 to 80%
- sold chunk of Brit for $375 million (tied to Riverstone sale for $700 million)
Fairfax has been very busy the past 5 quarters adding value for shareholders.
And what about the management teams of the various equity holdings? Have they been hard at work adding value to their companies? Yes!
- Atlas - 20% growth (top and bottom line) likely coming the next 3-4 years- Eurobank - continues to fix balance sheet; poised to do very well as Greek economy emerges from covid
- most of Fairfax’s equity holdings are positioned very well right now.
Almost forgot… Digit revaluation will add another $46 to BV likely in Q3!
To sum it all up: increase in BV + increase in investment in associates + improvements in insurance business + Fairfax management actions + management teams of equity holdings + Digit revaluation = yes, in buying Fairfax today an investor is buying at a cheaper price than when Prem made his purchase back in June 2020.
Viking, Thank you so much for your comprehensive write-up of the recent value creation. I guess I was lazily focused on the big chunks of value from Digit, ATCO, and insurance operations, so your many points add to this. I was fortunate to be able to add to my sub $300USD positions from last year at $405 on Monday. I plan to buy more if this divergence continues at the same rate. At minimum I’ll enjoy the 2.5% yield in 4 months! Thanks again for this and your many other helpful updates!
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1 hour ago, Gregmal said:
Covid distortion aside, theres an obvious different between buying a home and a car. And outside of the obvious one with regard to the long term desirability of the asset, I'd say the buying/selling process is much simpler for a car. I dont think cracking the home buying process will be easy, but you have the ingredients already. Again 39/40 doing a transaction go to Zillow at some point in the process. Thats all you need in terms of moat to kind of tinker with different stuff until you get it right. Imagine a world were you spot the home you want, apply through Zillow for financing, setup via the site a walkthrough tour either virtually on the spot or in version next day...where doors can be unlocked through the cloud, and then after exiting the property can submit a bid or buy it now? You wouldnt even need to charge a commission if you can automate all the bullshit title stuff. Almost all of it is nonsense that is hugely marked up. I'm doing a refi right now and these things are like 2% of the home price by themselves. Maybe charge a 2% total commission or 1% to each side. Then because you originated the mortgage yourself you get that $ too? Its a massive opportunity. I dont see anyone else having anything close to the footprint to do it.
Also, on I-buying, look into it. Theyre not buying anything, theyre buying what the data is telling them is the best markets. And they offer like 10-20% below market in many case. Big difference from buying a used car 20% above MSRP.
Fair enough on the depreciating asset point (autos) vs appreciating (SFH), and this was a point I nearly called out because it’s an easy issue to raise, but my bigger issue is the brokerage business. I don’t see a path to a winner takes all consolidation of the business unless it occurs through M&A, at which point I suspect it looks a lot like the investment brokerage business. Of course this ended in zero commissions and left remaining participants scrambling for other profit centers (pay for order flow). Believe me in that I totally was where you are in terms of seeing it as a big opportunity, but I’ve more recently cashed out of this theme for much more boring ideas given the overall market frothiness (T < $27, BAYRY < $13.50).
That said, I want to very much thank you for your fantastic ideas and write-ups on APTS & FRPH, which have done well and continue to be interesting opportunities.
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2 hours ago, Spekulatius said:
I am it doubting the need for disruption, but COMP is pretty much supporting a plain vanilla agent model, as well as Z actually when you take out the I-buying part. the only disruption here is RDFN.
Both RDFN and Z are now betting the farm on ibuying, which to me seems like poor low ROE business model. make a little money when the market is strong, lose a lot when the market turns sour. Another my cup of tea.
I also think that once those guys really get big in ibuying, there is going to be a lot of scrutiny on cornering the markets, but I doubt we ever get that far in the near term future.
This is kind of my thinking as well, which is why I owned Redfin for a period of time. As I watched SoftBank Vision fund plow money into Opendoor, which now has a ~$12B valuation, then Compass ($5.5B), and read about EXP ($7B) and now several other venture stage companies I put it in the too hard pile. Definitely a great opportunity for disruption, but it seems like that’s well known, and can all these valuations be justified? Is it a winner takes all business or does it just become a more fragmented industry with slightly lower aggregate commissions? If the game is a race to the bottom on commissions, I don’t get the current valuations. I also don’t see Warren & the incumbents going down without a fight.
BTW, on ibuying, this hasn’t worked well in autos yet, but I do appreciate Vroom buying a sports car from me after driving it for 14 months during the pandemic at almost 20% above what I paid for it.
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Long time follower of this great investment community, but first time post. I’ve owned Berkshire since ‘98 and have owned Fairfax off and on for 10 years or so, most recently getting back in during the March 2020 COVID downdraft. With that backdrop, I’m interested in what folks think about value today compared to when Prem purchased shares at ~$308 in June of 2020. The share price today is roughly $100 higher on an absolute basis, but Digit, Atlas and a generally favorable operating performance since has pushed book value up by $152 (giving full effect for Digit valuation markup) since his purchase. Is Fairfax “cheaper” than 15 months ago, is the Digit, Atlas, etc. driven book increase a mirage or something else? Appreciate your thoughts.
Fairfax 2021
in Fairfax Financial
Posted
I hope #2 is off the table. Buying shares back would be great here, but I don’t like having the exposure of the counter party’s incentive structure of the TRS instrument. Given the trading volume it wouldn’t be difficult to force payment through well timed short sales. Besides, I thought they promised not to short and use instruments like this going forward. It’s like being married to a wealthy and successful doctor with a gambling problem on the side. Please just run the business, maximize free cash flow and manage the balance sheet the right way. This is one area where MKL is far superior.