Fairfax next quarter

[ubuy2wron]

MR. Mkt in his infinte wisdom has decided that at least in Canadian dollar terms FFH is worth about the same as it was 12 months ago. If one looks back Prem had recently removed his equity hedges and telegraphed a series of all in bets. Today he has partially replaced his hedges and built a fortress balance sheet. Mr Mkt seems to only to be interested in FFH quarterly results hence the best guesses by some of the more informed posters here re this topic would be much appreciated as I would like MR. Mkt to pay for  a nice gift for my wife for XMAS.

[JEast]

Yes it somewhat surprising that Fairfax is down for the given the progress and especially that more and more revenue is non-US currency. But then again, Mr. Market has been very bi-polar with respect to Fairfax over the last 6-7 years.

 

Too bad we can not buy any LEAPs or sell PUTs now at these prices.

 

 

Cheers

JEast

[Viking]

I just started to review this very thing yesterday. I have edited what I posted a few months back... looks to me that not much has changed. In the near term the key catalyst for a pop in the share price would be if FFH aggressively buys back shares. The risks to the down side include the insurance soft market getting worse or a sell off in risk assets. With shares at $346 the company is cheap but not crazy cheap (given the risks).

 

Looking out 12 months I think it reasonable to assume FFH will earn $24/share, driven mostly by interest & div income (I am assuming underwriting and investment gains will be a small positive). And yes, I am trying to be conservative. This implies a 6.3% growth in BV.

 

Here is my very rough calculation of what FFH should earn going forward. Please correct me as you see fit. This is also an annual estimate and quarterly results will vary dramatically.

 

1.) Underwriting income (CR = 100) = $0 mill

2.) Int / Div Income (Q2 $184.5x4) = $740

Operating Income = $740

3.) Net Gains on Invest (see below) = $960

4.) Interest Exp ($152 + 30 new debt + 14 pref) = $200

5.) Corporate Overhead = $100

Pre Tax Income = $1,400

6.) Inc Taxes (28%) = $392

Net Earnings = $1,008 = $49/share

 

Q3 BV = $372

BV Growth = $49 = 13.2%

 

Where this gets a little more interesting is when you overlay what many have talked about previously.

- I am assuming CR = 100. Given the soft market, this is likely not conservative enough for the next 12 to 24 months.

- 9% return on investments may be a little too aggressive looking out 12 to 24 months given how much risky assets have appreciated (stocks, corp & muni bonds). However, given the market (lots of volatility) is in Hamblin Watsa's sweet spot as they tend to trade and not simply buy and hold. The hedges put in place will also cost some $ if the market goes sideways for a while.

- I also expect that will all subs under one umbrella there will be some restructuring that will improve results to the bottom line (over time).

- insurance hard market? Looks like it will not be happening soon (to much capacity). When this happens this could really juice FFH BV growth.

- and lastly... what rabbits will Prem and team pull out of their hats next (they are there!)?

- one catalyst for FFH will be share buybacks. FFH has been quite predictable so far in what they are doing with their excess cash (bought NB & ORH). I think the next big move will be share buybacks, assuming earnings stay reasonably strong and shares continue to trend down. The only question is when do they start?

- The dividend announcement will be out in early Jan and I expect $10 to $12/share (up from $8); this may result in a short term pop in the share price.

- I expect the delist from NYSE will reduce demand for FFH and this will have a near term negative impact on FFH price. Not a bad thing for FFH if you are sitting on a bunch of cash and you are wanting to reduce your shares outstanding in a meaningful way.  

- for Q4 I expect a CR = 100; solid int & div income and flat investment gains/losses = about $6/share

- note, FFH may realize some gains so earnings per share may be higher (offsetting comprehensive income); I am expecting BV to grow about $6.00/share.

- weave it all together... Q4 BV = Q3 BV $372 + $6 (my est for Q4) = $378

- cost today $346 for 14% grower with nice long term upside potential... pretty good buy.

- and, yes, fasten your seat belts; as we learned in Q1, the ride will not be for the faint hearted!  

__________________________________________

Net Gains on Investment

- total portfolio investments = $18,887 (p9 of Q2) = $924/share

- 10 yr avg return = 9% x $18,887 = $1,770

- Net Gains = I/Div Income $740 - $1,700 = $960

[Nnejad]

Your double counting on some interest expense.  The unsecured notes were issued mid August.  Interest expense in Q2 was 37.7, so you should annualize that number instead, leading to about 10 million more in pre-tax income for year.

 

Otherwise, it's pretty solid.  :D

[oldye]

Only thing I would change is that Interest and dividend income will be north of 200 million per quarter going forward due to the acquisitions, putting money to work etc.  CR could be a little better than 100 during Q4, but going forward without a hard market I'd be extremely happy if they are anywhere close to 100. 

[Uccmal]

Too bad we can not buy any LEAPs or sell PUTs now at these prices.

Cheers

JEast

 

Hi James, Have you looked into this.  It looks to me that the options are trading off the Pinks now.  I would think anyone could sell options against the frffh.pk symbol. 

[Guest Dazel]

 

The upside surprise could be corporate and other debt the company owns...including a previously mentioned gain in the California bond issue...I believe they made about $100 million in one day...I will do more homework...the market is not expecting much obviously with the sad share price...

 

I was wrong about the size of the gain they had last quarter in corporates and foreign exchange...we shall see this time around. I for one am very excited about the prospects of their international exposure especially after their recent purchases.

 

Dazel.

[beerbaron]

Whatever the metrics the current quotations are a good price. Bough some today.

 

I hope this NYSE delisting will continue to depress the stock, I love buying great companies for a good price it's getting scarce by these days.

 

It sucks for the US board members tough.

 

BeerBaron

[valuecfa]

I added to my FRFHF......whatever,  today.  I wouldn't mind seeing a smaller corporate share count in the next release.

[ERICOPOLY]

In the near term the key catalyst for a pop in the share price would be if FFH aggressively buys back shares.

 

The SEC had these rules about how many shares you could purchase per day, based on percentage of average trading volume.  They don't have to worry about the SEC's rules any longer.

 

What do the TSX rules look like? 

 

[ourkid8]

In the near term the key catalyst for a pop in the share price would be if FFH aggressively buys back shares.

 

The SEC had these rules about how many shares you could purchase per day, based on percentage of average trading volume.  They don't have to worry about the SEC's rules any longer.

 

What do the TSX rules look like? 

 

 

http://www.fairfax.ca/Assets/Downloads/Press/fpr2009-09-22.pdf

 

"The average daily trading volume of the subordinate voting shares of Fairfax on the TSX for the six months ended August 31, 2009, calculated in accordance with the rules of the TSX for the purposes of the bid, is 40,806 shares. In accordance with the rules of the TSX, 25% of that average daily trading volume (10,202) represents Fairfax’s daily limit (excluding permitted block purchases) for purchases under the bid made through the facilities of the TSX. This bid will commence September 24, 2009 and may extend until September 23, 2010."

[Viking]

For those who are wondering how the FFH stock portfolio is doing (as reported in 13F), here is an updated spreadsheet. As of today (Dec 16) it is down $16 million or 0.4% (basically flat).

 

Does anyone know when the Burlington Northern deal will close? Proceeds for FFH will be $200 million (5% of their equity holdings) and the gain will be reported as net income.

 

Does anyone have an opinion of what has happened to muni and corp bond yields in the last quarter?

 

I expect that interest and dividend income will increase again due to the bonds purchased in Q4.

 

In Q3, by hedging 25% of the equity portfolio and also selling some positions (i.e. Alcoa, BCE) FFH has been getting much more conservative. It will be interesting to see what they were doing in Q4 and if this trend of being a net seller of equities continues.

 

These moves certainly give investors some insight into how FFH views financial markets (valuations and near term prospects).

[oldye]

Berkshire has a special meeting set up in January to vote on the issue so sometime 1st Quarter the deal will close.  I hope they take Berkshire stock instead of the cash. 

[Guest Dazel]

H&R Real Estate Investment Trust Announces Agreement to Redeem the Fairfax Warrants and a $150MM Convertible Unsecured Subordinated Debenture Issue

 

 

This is what I have been talking with reference to the coroorate bond portfolio that Fairfax has...It looks like another big gain....the market yawns...they have a santa sack full of these types of securities!

 

Dazel.

[Myth465]

Looks like both of these transactions will hit in Q1 next year. Anyone know what the basis is for the HR REIT one.

[T-bone1]

They bought a $200MM 11.5% debenture a year ago and got the warrants for free. They are now getting $186MM for the warrants (the new $150 debenture isn't going to them, its going to someone else so that company can pay off the warrants). The warrants are being cash settled.

 

So for $200MM they got a debenture in the same amount worth more than par today, and a 93% pretax profit in one year on top of that!

[Redskin212]

That is incredible!!!

[StubbleJumper]

They bought a $200MM 11.5% debenture a year ago and got the warrants for free. They are now getting $186MM for the warrants (the new $150 debenture isn't going to them, its going to someone else so that company can pay off the warrants). The warrants are being cash settled.

 

So for $200MM they got a debenture in the same amount worth more than par today, and a 93% pretax profit in one year on top of that!

 

Hmmm...so, that's like 9 bucks per share, before tax.  Very nice!

[Myth465]

Now I have the task of raising the cash to exercise my FFH Leaps when the time comes. Thats a pretty amazing transaction, the bond team really seems to be doing amazing things.

[JEast]

If I read and interpret this correctly,

 

Contemporaneously with the issue of these Debentures, Fairfax will be granted warrants to purchase

28,571,428 stapled units at an exercise price of $7.00 per stapled unit (or net proceeds of approximately

$200 million if exercised in full) which are exercisable for a period of 5 years from the date of grant.

 

this would imply that FFH has made $185M on the warrents, plus they still have the $200M earning 11.5%. That's roughly a capital gain of $8 to book after taxes.

 

 

Cheers

JEast

[Guest ValueCarl]

While perusing Viking's spread sheet, with specific interest in FFH's (3) common stock holdings steady at 139M shares, with reference to hybrid debt tied to convertible bond tranches, I wonder if someone has an updated share count assuming they convert their full boat load at some near term date?

 

LVLT's most recent filing tied to 7 percent interest bearing converts, are "for sale" by FFH, publicly or in a privately negotiated transaction as detailed here.

 

http://www.sec.gov/Archives/edgar/data/794323/000104746909009485/a2195209zs-3asr.htm#ds45101_selling_securityholder

 

Stated differently, excluding these approx. 42M shares and other previously filed registration statements for this institution to sell other converts, what would their aggregate share count be upon conversion?

 

The last time I looked, I believe it was approx. 320M fully converted shares by FFH in (3).

 

I have also noticed most of (3)'s bond tranches with the exclusion of the longest dated 2017's at or nearing PAR. tia

 

 

       

[JEast]

Looks like the H&R transaction actually closed on Dec 29th and will be in the 4th quarter results.

 

http://www.newswire.ca/en/releases/archive/December2009/30/c5899.html

 

 

Cheers

JEast

[Guest ValueCarl]

Shall we try again? Who can give me a better share count than Ben Hacker who was wrong, at least initially? Who can tell me what the price of the LVLT bonds might be telling market participants in the short term? Do investors need to correctly exclude filed shares like these from FFH 's ultimate holdings to be contained inside of their future stake once converted?

 

Be succinct! imo

 

ValueCarl

Newbie

 

Posts: 49

 

 

   

 

Re: Fairfax next quarter

« Reply #20 on: December 21, 2009, 08:11:45 AM »

Quote  Modify  Remove

While perusing Viking's spread sheet, with specific interest in FFH's (3) common stock holdings steady at 139M shares, with reference to hybrid debt tied to convertible bond tranches, I wonder if someone has an updated share count assuming they convert their full boat load at some near term date?

 

LVLT's most recent filing tied to 7 percent interest bearing converts, are "for sale" by FFH, publicly or in a privately negotiated transaction as detailed here.

 

http://www.sec.gov/Archives/edgar/data/794323/000104746909009485/a2195209zs-3asr.htm#ds45101_selling_securityholder

 

Stated differently, excluding these approx. 42M shares and other previously filed registration statements for this institution to sell other converts, what would their aggregate share count be upon conversion?

 

The last time I looked, I believe it was approx. 320M fully converted shares by FFH in (3).

 

I have also noticed most of (3)'s bond tranches with the exclusion of the longest dated 2017's at or nearing PAR. tia

 

 

[Uccmal]

Be succinct! imo

 

ValueCarl

 

How's this for succinct:  Go elsewhere!

 

 

[Guest ValueCarl]

In ancient times, pharaohs by decree would have their way.

 

 

Sianara, pompous men filled with the hubris and arrogance of Egypt before her plagues.

 

 

<Go elsewhere!>