kodiak

I am wonderfully excited about Fairfax India buying another 10% of the airport. I think this is great news. I understand that some are concerned that the price Siemens is selling for represents 10% of the fair market value of the asset. I don't believe this is the right way to value the asset. This is a minority sale in which the possible buyers are a relatively small number of potential entities. Siemens has a strategy in which they make initial investments in airport type assets to insure that their technology systems are used in the infrastructure. They typically make these kinds of investments as a way to guarantee that they become the dominant technology/communications partner in the airport. Once the infrastructure asset is built and completed, they no longer need to be an investor in the project. Hence, the selling of their interests in this asset. Of course, we are the only real logical buyer and are able to buy the asset for a quite reasonable and below market value. Minority investors in general don't get a great execution on price and this is another example of that occurrence. Siemens will then likely recycle these proceeds to anchor their next infrastructure investment. I went on the Fairfax India tour in January of 2020 and I am scheduled to go on the tour again this January. I believe the airport and the monopolistic characteristics make this one of the finest assets to own in the entire world. The airport is growing quickly, the country is growing quickly and we are back to pre-Covid travel levels. This is a world class asset. Plus we have very strong management of the asset led by Hari Marar, CEO of the airport. I also believe that Fairfax India will have to have a shareholder vote as outlined in a previous post by Safety in Numbers, since they have a 25% asset threshold. I believe the vote will only cover this issue and I don't expect the company to issue extra shares or anything else that shareholders might be worried about right now. In fact, I have recently been slowly adding to my Fairfax India position as the valuation story seems too compelling. I have attached a picture of the airport taken in 202o from the control tower. It is much bigger today with the new terminal. On final note, while Fairfax Financial is about the 25th largest company based upon market capitalization and that alone should make us the most likely next company to be added to the TSX 60, we are the 7th most profitable public company in Canada. I learned that fact today and it makes perfect sense. What other big company in Canada is trading for 8 times earnings. I still think Fairfax Financial and Fairfax India represent two of my absolute favorite investments in my portfolio.

Reported earnings after the close. Another very solid quarter. $42.62 in per share earnings. 93.9% combined ratio, net written premiums up 2.8% before Gulf increase. $1033 3rd quarter end book value, up 11.7% YTD. $2 billion in cash at hold and another $2.1 billion in investments. Very strong balance sheet. FFH has now bought back 1 million shares this year at $1,112 average cost. 4.35% of the shares in 9 months. Net written premiums are now at $26 billion on a run rate basis. Run rate dividends and interest is now $50 per share. Run rate profits from affiliates is almost $25 per share. Run rate underwriting profit at 94% is $70 per share. All pre-tax #’s. Another strong performance by Prem and the team. We are currently selling for around 8 times annualized earnings and 121% of book. We likely get added to TSX 60 in next 12 months, if not in December. This is a great result and I continue to like this story very much. We are still in the early innings in my opinion. More good news to come over the next few years.

The next four years of Fairfax and why the shares still seem quite cheap today. The company is expected to make $4.0 billion pre-tax for the next 4 years from existing operations and the current balance. This is $140 per share in after tax earnings, with very little projected from the equity investments. That is upside to the entire 4 year projection. 2024 - Current book value as of the end of the 2nd quarter is $980. Assuming we earn $35 per quarter after tax, plus at extra $13 from the sale of Stelco, we would end 2024 with $1,063 in year end book value. Plus at least an extra $50 dollars from the consolidated companies that doesn’t get included into book value. This calculates to a $1,113 year end 2024 book value. 2025 - The company earns $4.0 billion plus an extra $320 million after tax ($4.0 billion from 2024 which earns a 10% return and 20% tax rate divided by 23 million shares). Total after tax earnings are $140 plus $14 or $154 per share. Year end book value is $1,267, assuming reinvestment of $15 dividend. 2026 - The company now earns $4.0 billion, plus $400 million from 2024 retained earnings, plus $400 million from 2025 retained earnings. Total after-tax earnings are $167. This keeps assuming we earn only 10% returns on equity. Year end book value is now $1,434. 2027 - The company now earns $3.2 billion because interest rates have fallen from 5% to 3.5%. $400 million from retained 2024 earnings, $400 million from 2025 earnings and $400 million from 2026 earnings. Total after tax earnings are $153 per share. Since bond yields have fallen, we are now earning only 3.5% on our $40 billion so we “lost” $21 dollar per share in earnings. But we buyback $2.5 billion in our minority stakes in the insurance companies and now generate an extra $500 million pre-tax in earnings from that consolidation. That buyback generates $400 million after tax or $17 of extra earnings. Plus, we generate $4.4 billion in earnings in 2027 and use only $2.5 billion to buy back the insurance subs. Therefore we still have $1.7 billion in retained earnings and that generates $6 per share in after tax income moving forward. So in the year we lose 1.5% of our bond yield, it is possible that our earnings still go up $9 dollars per share to $176 and our year end book value is $1,604. If Fairfax shares trade for 140% of book value, the stock would trade for $2,245 per share. That scenario assumes only a 10% return on equity on retained earnings, a drop of 1.5% in the earnings from the income portfolio, with no other strategic moves from the company. Also, very small returns from the equity portfolio. This doubling in 48 months simply doesn’t require much to happen. This assumes no share buybacks. Given that we are buying shares at around 7 times earnings, we are actually earnings a 15% return on those purchases. The company has so many ways to improve on this basic pro-forma. This increase over time in retained earnings is what the analysts are missing. In 2027, our earnings per share should be in the $176 range and that assumes a drop in interest rates. I think the company will far exceed this basis projection.

Premium growth was only 3% net of Gulf increase largely due to decrease in premiums from Odyssey. That is a very smart reduction. They are not extending themselves on premiums. Playing within their abilities and financial condition. That will help all shareholders over time. Solid quarter from the company.

My estimates of intrinsic value and where this will trade in 36 or even 60 months do not assume any major buybacks from the company. It is possible that Fairfax takes the share count from the current 23 million shares to 18 or even 15 million depending on how much cash the insurance business generates once premium growth starts to slow down. In a world of zero premium growth and respectable combined ratios, Fairfax will not be required to keep injecting capital into these businesses, as they have over the last few years to fund the growth in premiums. Once premiums stop growing, these same insurance subsidiaries will begin to send capital back to the parent. The uses of this capital will include the buying back of all the remaining insurance stubs from OMERS. I would also expect them to take a couple more public companies private and finally, buyback shares below 120% of book value. If they earn $150 per year for three years, that generates over $11 billion in capital. That capital is going to go somewhere. After the minority cleanups, we might see some meaningful repurchases. Those are not in my projections. If they happen, the chances of a $2,000 or $2,500 Fairfax share price in less than 5 years grows considerably. At the current price of $730, this stock is simply too cheap and I would argue a better deal at $730 than $500 one year ago. People selling at $730 today simply aren't doing the work to calculate the earnings power of Fairfax or must be finding other stocks to own. I would love to know what they are buying to justify selling Fairfax. They have to be fantastically cheap stocks with a wonderful margin of safety. I am selling other things in my portfolio to currently buy shares of NextNAV, a $300 million market cap failed SPAC that owns a portfolio of 2.4 billion POPs of nationwide spectrum in the 900 MHz band. This spectrum is worth between $1.5 and $2.5 billion and should be monetized over the next 24 months. The stock is $2.67 and I expect the shares to be worth easily north of $10 each in 24 months. They also have a cutting edge alternative to GPS which you get for free and could be worth $10 or $15 in 3-5 years. Finally, the corporate governance is fantastic, with heavy inside ownership, very smart spectrum folks on the Board and a history of making money for investors. Even with all that potential upside, I am not going to sell Fairfax to fund the purchase of NN shares. NextNav investor presentation.pdf

Intrinsic Value Estimate Book value is around $800 today. It will be close to $1,300 in three years as we earn $150 per share over the next three years. We earn $50 per share from bond portfolio, $50 from underwriting and $50 from equity gains. In 36 months, book is $1,300 and shares have to be at least 120% of book at that time. Hence $1,560 per share USD in 36 months. In my model, current price of $730 is nuts. We could easily be trading at 120% of book today and that number would be $960 USD right now. That would be a reasonable value today. If you paid $960 today and the stock was worth $1,560 in 36 months, the annual return would be north of 15% annually. That seems about right to me. If they execute on this 3-year plan, the price to book should move closer to 150% of book. So in 5 years if the company continues to execute, you might get closer to book value of $1,600 and then at 150% of book, the stock has a shot at trading for around $2,400. This may seem crazy, but if they execute, these are reasonable targets.

I thought the 1st quarter earnings were just as good, if not better, than the 4th quarter 2022 earnings. These are fantastic results and the future earnings potential of the company has never been better. We are locked on bond portfolio, the underwriting results in this hard market should be fine and the results from the equity portfolio are icing on the cake. I was very disappointed the market did not give us instant gratification on Friday. I added to my already oversized Fairfax position. I simply think Fairfax stock price will double over the next 3 years. The math looks pretty simple. The book is $800 and we are sell for less than $700. We are going to add $150 per year for three years from earnings. Book value in 36 months would therefore be around $1,250 per share. The extra $450 per share in earnings should generate another 10%+ on equity, so earnings in year 4 could be closer to $200 per share. If the shares trade for $1,400 each in 36 months, they will be trading at 112% of book value and the company will be looking at a return on equity on that book value of about 16%. That does not include any good news from Digit, Anchorage, extraordinary buybacks at Fairfax or anything else. If people have easier to understand set up than Fairfax for the next 3 years, please tell us. This elevator pitch took one long paragraph. Maybe 150 words. Plus it is happening right now. No turnaround necessary. No special potion or magic trick. It is all in front of us. We can think about things that will derail this story, but the basic story is so simply that being contrary may just end up costing folks money. This is the fat pitch that Ted Williams and Buffett talk about all the time. Investing is about probability. Doesn't mean it has to happen. This set-up has high probability for excellent outcomes. My investment is Pathward (CASH) has the same risk/reward type set-up. Wish I really had more of these.