Results out-BAM! Another home run!

[mranski]

if you look at this on an earnings basis, it seems extremely cheap, or am i missing something.

 

[Smazz]

Lest we forget we are not in the insurance business for the insurance business.. we are in it for the float. Just cant get the float without the insurance so its a devil we will dance with.

[ERICOPOLY]

And if you want to be in the insurance business for the insurance business, there is MKL.  But with MKL you are not getting the underwriting profit for free...  you have to pay for it just like any business that isn't selling for free.  It's a BV premium, and when paying that premium one needs to realize that it's just like anything else... you pay a multiple of earnings.

 

You can start out with $1.35:

A)

Buy $1 of FFH

Buy 0.35 of any other business that earns a profit

 

B)

Buy $1 of MKL book and pay an additional 0.35 for MKL underwriting profit (can't buy one without the other)

 

 

Is it more complicated than this?

 

[Uccmal]

if you look at this on an earnings basis, it seems extremely cheap, or am i missing something.

 

mranski, do you have a penchant for understatement or what?

 

- PE = 6 x;

- p/b =0.95;

- debt to equity either 20% or zero (debt so far out as to be equity);

- a fortress of cash

- growing at > 15% per year.

- gauranteed interest and dividend income of 700 M per year.

- and now stock portfolio is partially hedged above where the market closed today.

 

They are being priced as a Deep Value stock.  If this were three, or twelve years ago this would have been in the 800s - 1000 US range. 

 

 

[Grenville]

Q: In March when markets turned, you hedged 25% of your equity portfolio (after removing hedges in late 2009) why?

 

A: “Stock prices have gone up from March 9, 50% to 60% but we test things. We look at the biggest potential risk such as a drop in stock markets of 50% and, at same time, a one-in-250 catastrophe in the insurance world such as a US$100 billion event. This would be a hurricane hitting Miami or a major earthquake in California.”

 

“By hedging 25% of our portfolio we could handle both those events with basically no impact on our cash in our holding company. That’s the type of protection we like to provide our shareholders and company with.”

 

http://network.nationalpost.com/np/blogs/francis/archive/2009/10/30/smartest-guy-in-the-room-on-markets.aspx

 

still reading the article, but that answer jumped out at me, given the discussion.

[NormR]

if you look at this on an earnings basis, it seems extremely cheap, or am i missing something.

 

mranski, do you have a penchant for understatement or what?

 

- PE = 6 x;

- p/b =0.95;

- debt to equity either 20% or zero (debt so far out as to be equity);

- a fortress of cash

- growing at > 15% per year.

- gauranteed interest and dividend income of 700 M per year.

- and now stock portfolio is partially hedged above where the market closed today.

 

I'm a big FFH fan but how do you figure that the $0.7B interest/dividend income is guaranteed?

 

Also, I think you have to expect FFH's EPS to be lumpy.  Are the big gains of the last year likely to occur each and every year?  I doubt it.  I'd be more than pleased if they occur every few years.

 

[Uccmal]

if you look at this on an earnings basis, it seems extremely cheap, or am i missing something.

 

mranski, do you have a penchant for understatement or what?

 

- PE = 6 x;

- p/b =0.95;

- debt to equity either 20% or zero (debt so far out as to be equity);

- a fortress of cash

- growing at > 15% per year.

- gauranteed interest and dividend income of 700 M per year.

- and now stock portfolio is partially hedged above where the market closed today.

 

I'm a big FFH fan but how do you figure that the $0.7B interest/dividend income is guaranteed?

 

Also, I think you have to expect FFH's EPS to be lumpy.  Are the big gains of the last year likely to occur each and every year?  I doubt it.  I'd be more than pleased if they occur every few years.

 

 

Hi Norm,

 

Agreed on the lumpy results... So give it a PE =12 or something.  It will still be very cheap.

 

185 Million per Quarter of dividends and interest:  We have to go to the source which are bonds, and certain stocks.  That gives me 740 ... reduced to 700 to be conservative even though it is more likely to rise. 

 

So what are the sources:

 

JNJ, PFE, USB, GE, and other stocks - many of these will raise their dividends as time goes.  I am thinking unless they become very overvalued FFH will keep them indefinitely.  This is new to their portfolio as a recurring item.  Several of these will raise their dividends back up, some by megajumps as their earnings recover.

 

Money in special corporate financings (i.e. Megabloks, Mullen Group) - often earning 10%).

 

Money in safe bonds Munis, Gov't bonds. 

 

That's why I think of it as perpetual

 

 

 

[oldye]

Yea Wells dividend alone should be up 7x sometime.  12x for a 15-20% grower is still a great deal!

[niels12think]

if you look at this on an earnings basis, it seems extremely cheap, or am i missing something.

 

mranski, do you have a penchant for understatement or what?

 

- PE = 6 x;

- p/b =0.95;

- debt to equity either 20% or zero (debt so far out as to be equity);

- a fortress of cash

- growing at > 15% per year.

- gauranteed interest and dividend income of 700 M per year.

- and now stock portfolio is partially hedged above where the market closed today.

 

They are being priced as a Deep Value stock.  If this were three, or twelve years ago this would have been in the 800s - 1000 US range. 

 

In reality, P/E<3 when taking into account the full earnings:

book value increase per share Jan-Sep incl. $8 dividend: (7,650M - 4,969M - 1B) / 20.3M + 8 = $90.8 

book value increase per share extrapolated linearly to full year: $121

 

conclusion

current price per share of $354 seems to represent a severe mispricing, especially if the Fairfax track record is taken into account  :o

 

Cheers