is Fairfax a 33 cent dollar?

[oldye]

(Warning: this is meant to be a little silly. I hope to make a point about how all projections really do is let the right side of your brain be a little creative.  It doesn't matter if you do multiple of book or project 15% growth into infinity, standard deviation will ensure that you won't be precisely correct but if you are conservative you can be relatively correct which is all I want to be!)

 

 

is Fairfax a 33 cent dollar?

 

more specifically are you receiving 3$ of value 5 years from now for every dollar you invest today?

 

Lets assume todays base price of 300$ a share, what would make someone want to pay you 900$ 5 years from now?

 

I didn't spend 4 years of my life learning to work with 2 variables and projecting growth into the future indefinitely for nothing. I'm going to put my hammer to use!

 

Assumptions:

Fairfax is finding enough opportunities in equities today to put another 1.2 billion dollars to work in the first 2 quarters leaving them with a 5 billion dollar portfolio with an equity+dividend coupon of 10% or 500 million. 

From that point the company makes no new equity investments for the next 4.5 years.  The rest of the company, you know the insurance, convertible, muni and corporate bonds break even over 4.5 years(ok not even, makes just enough money to offset any taxes they pay on their equities.. ).  the only thing that happens in 5 years is that the Equity Yield on their 5 billion dollar investment doubles from 500 million to 1 billion dollars.  Slap on a 15x multiple on the yield (appropriate for market leading companies in many different industries) and boom shareholder equity is at 15 billion or 3$ for every $ you invest today. 

 

This implies that FFH could average more than 100$ a share of BV growth over 5 years using only 25% of their portfolio  :o

 

 

 

 

[SharperDingaan]

 

Oldeye we had pretty much the same thought, but came at it a little differently.

As Prem seems to work with 5yr intervals, what do we need to get to CAD 1000/share if the average ROE between now & then is 20%/yr ?

 

The BV multiple at the end of yr 5 would need to expand to 1.14x  [282.70/.8004 x1.2x1.2x1.2x1.2x1.2x1.34]. Today its 1.02x  [uSD 282.70/USD 278.28], the closing BOC CAD/US FX rate is .8004, & we still need to get through a truly historic recession/depression. The 5yr compound return (ex divs) would be 23% & seems a reasonable proposition. With divs included the return is even higher.

CAD $353.20 today for $CAD 1,000.00 in 5yrs - a 35 cent dollar.

 

But .....

You have to hold for the entire 5yrs. May be the intent, but most on this board will not hold that long.

Very bumpy ride. Human nature is to react, averages conveniently ignores that.

Variables. ROE average, multiple expansion, FX rate, recessions length. They all need to line up.

 

So ...

If you lock the stock away, & treat it essentially as a 5yr bond, it is a 33c dollar with approx a 25% YTM.

Over the next 5 yrs, comparable equities need to be at least 3-baggers (& higher if more risky)

This should be viewed as the benchmark holding

 

All kinds of PM implications

 

SD

 

 

[oldye]

"Over the next 5 yrs, comparable equities need to be at least 3-baggers (& higher if more risky)

This should be viewed as the benchmark holding "

 

Ah but how to quantify risk, how much more of a return must you demand from Fairfax compared to Berkshire Hathaway?  Of course it doesn't have to be either or but what if it was. 

[FlyingArrow]

 

is Fairfax a 33 cent dollar?

 

 

If it wasn't yesterday it sure is today... ;D

[Guest ericopoly]

My thinking is that it closed at about 6x after-tax operating earnings.

 

 

[oldye]

My thinking is that it closed at about 6x after-tax operating earnings.

 

 

 

sounds about right!

[SFValue]

well...I am trying to understand the market's reaction to the report.

 

I think the market does not care for FFH now that the CDS are mostly gone (and Tys). 

 

Market is repricing based on latest 13F would be my guess.

 

never mind the munis, corporates, CDS still in the port, cash...does the market care that BRK insures most munis?

 

I hope the company is buying back more stock , based on last years actions I would guess they are....

 

any thoughts?

[Vizi1]

So with FFH down 25% in 4 trading days, at which point do you, as an individual, start getting back into FFH?  I am nearing my purchasing point.

 

 

[Crip1]

Definitely nearing another purchase point...This is crazy.

[T-bone1]

the company repurchased 1,066,000 (rounded) shares during 2008 for $282 per share.

 

The company is worth more now, and the other opportunities are better, so I consider it a wash.

 

I am with Prem and consider $282 a good purchase price, I would bet the company is buying today.

[SharperDingaan]

 

The technicals (voodoo) suggest waiting untill we know if the whole market is going to go through the Nov-2008 low or not. Assuming it does, another 5-10% is fairly likely.

 

 

[Zorrofan]

Given today's drop, I can only hope that, yes Prem is buying - hand over fist!!

 

:P

 

cheers

Zorro

[Viking]

I think Fairfax is a very hard company for most people to wrap their head around. I am not sure how institutions would value the company. Their business model has evolved so much over the past 36 months. You cannot simply look at what has happened the past 5 or 10 years and then simply roll that forward.

 

For insurance companies, most analysts lean heavily on predictable operating earnings. Looking at FFH the past 5 or 10 years on this metric would be difficult. How do you build in investment gains? Canwest? Abitibi? They have made some interesting purchases.

 

Bottom line is the majority on this board feel good about FFH's future because they TRUST management and feel the bets they have made (and will make in the future) will work out (similar to the past 5 years).

 

FFH appears to be evolving into a hedge/mutual fund with their core business being earning above average earnings off their investment float. I expect their share price to continue to have a lot of volatility as Mr Market does its thing.