Fairfax stock positions

[Viking]

5 hours ago, Thrifty3000 said:

Aight, continuing down my FFH per share look through earnings line of thinking, I came up with rough look through earnings per FFH share estimates for FFH's 9 largest common stock positions (which constituted roughly half the 2020 YE carrying value of FFH's common stock portfolio). I quickly dug up comments on earnings - or free cash flow - from various sources (including this message board), and I divided by 26 million shares (because I'm optimistic on repurchases).

 

Because it's really quick and dirty estimation, if I had a reasonable estimate of 2022 earnings I'd use that (thanks @Viking), if I only had Prem's comments on 2020 results I'd try to pin down the 2019 results and make a judgment call. On EXCO and Recipe I started with 2020 free cash flow and simply assumed 2022 would be 1 or 2 times better than their Armageddon performance (why I'll never be an accountant). And, for Fairfax India I just had to go with a crazy conservative number, because I've never been disciplined enough to pin look through earnings on that one down (believe me, I've tried).

 

So, I'm basically throwing this out there in hopes someone far more disciplined than me will be frustrated by my inaccuracy and offer a more precise estimation (in other words I'm trying to provoke somebody else to do the hard work, which makes me just a slightly more sophisticated troll than Liberty is on the Altius board. Haha, love you buddy - you know it's true).

 

I'll spare you my per-holding logic and just get to the point, here goes:

 

(look through USD per FFH share - assuming 26 million shares. To add margin of safety I usually round down to the nearest $.50.)

 

Atlas: $7 per FFH share

Eurobank: $6

Fairfax India (???): $2
CIB 290: $1.5

Kennedy Wilson: $1 per

EXCO: $1

Recipe: $1
Quess $.50 per
Blackberry: $0

 

Total: $20 per share

 

So, in addition to the $20 above, if we conservatively assume the after tax 2022 insurance earnings per share (without double counting dividend interest from the companies above) is $30 per share (see @Viking's recent analysis) then the look through earnings power from insurance and the 9 holdings above is approximately $50 per FFH share.

 

Now, the 9 holdings above account for only half of FFH's common stock carrying value. The big question is what is the rest of the portfolio capable of earning on a per share basis. And, this is where I have a bit of a thesis...

 

If the rest of FFH's assets (including the other half of the common stock portfolio) can earn as much as the 9 holdings above, then you are looking at total look through earnings per share in the neighborhood of $70 per FFH share.

 

If you can assume Prem is a reasonably disciplined value investor determined to earn a 15% return over time then if you divide the estimated $70 look through EPS by the $450 share price you get a year 1 look through earnings return of 15.5% - thus exceeding the investment hurdle rate.

 

In sum, a meaningful billion dollar buyback is looking like a gift from the investment gods, and Mr. Market is dumber than a brick on this one.

 

 

EDITS: The Following Estimates Added After The Original Post

 

BDT (Byron Trott): $1.5

@Thrifty3000 my view is there is no one correct way to value Fairfax. Rather it is best to come at it in a few different ways. And if they all tell you the same thing… well then… you might be getting close to understanding things. I like what you have done because it is something i have never attempted (trying to estimate look through earnings). I am almost done my estimate of the equity positions and should be able to post it soon  

 

 

[Thrifty3000]

2 hours ago, Viking said:

@Thrifty3000 my view is there is no one correct way to value Fairfax. Rather it is best to come at it in a few different ways. And if they all tell you the same thing… well then… you might be getting close to understanding things. I like what you have done because it is something i have never attempted (trying to estimate look through earnings). I am almost done my estimate of the equity positions and should be able to post it soon  

 

 

YASSS!! Now we’re talkin!  

[Thrifty3000]

14 hours ago, MMM20 said:

how do you account for something like Digit in this framework? I know they are just now (supposedly) flipping to break even so no major contribution to look through eps, but I feel like it could be analogous (on a much smaller scale I admit) to leaving out aws from Amzn valuation years ago. it’s more ‘explosive growth high tech investment’ vs ‘new insurance subsidiary’ IMHO.
 

I truly still can’t believe there is this 15x investment, $2b+, now-also-sequoia-backed hypergrowth long runway type of investment inside fairfax. feels like it’s still under the radar and needs more attention and some consideration in all SOTP-ish valuations til proven otherwise.

maybe the answer is just that FFH is truly now worth 1.5x bv?

 

Great question. I definitely factor low earnings, high-growth, high-potential, assets like Digit and Ki into the valuation. I just look at those after I’ve nailed down all the predictable earnings streams.

 

So, with FFH I start by estimating there’s $70 or so of predictable/knowable/quality look through earnings power in their portfolio. AND, it’s usually a good idea to spend some time looking at the sources of those earnings and make judgment calls about growth rates and ability to reinvest at decent returns. Is that $70 growing, stagnant or shrinking?

 

After that I’ll look at the wild card assets like Digit and Ki. For those I have to rely on recent arms length transactions, management communications and expert analysis to gauge what the asset is worth and could be worth in the future. If I feel the valuations are purely speculative then I may choose to ignore them. If I feel there’s real and growing value, but no earnings yet, I’ll probably come up with a pretty heavily discounted per-share value. Just making up a number for Digit and Ki, let’s say I think they’re worth $30 per share.

 

With an estimate of the predictable per-share earnings power, and a rough idea of the present value per-share of the non-earning growth assets, I feel pretty good about being able to look at the share price and decide whether a stock is a bargain or not.

 

For example, if FFH is selling for $450 per share, and for that $450 you’re able to buy $30 worth of wild card high growth assets and $70 of real, relatively predictable, annual, growing, diversified, look through earnings it’s pretty easy to see that Mr. Market isn’t serving up all that many other opportunities like that these days.

 

(And, as we value investors know, when you see opportunity you gotta be ready to act in a big way. Elephant guns.)

 

 

[MMM20]

3 hours ago, Thrifty3000 said:

 

Great question. I definitely factor low earnings, high-growth, high-potential, assets like Digit and Ki into the valuation. I just look at those after I’ve nailed down all the predictable earnings streams.

 

So, with FFH I start by estimating there’s $70 or so of predictable/knowable/quality look through earnings power in their portfolio. AND, it’s usually a good idea to spend some time looking at the sources of those earnings and make judgment calls about growth rates and ability to reinvest at decent returns. Is that $70 growing, stagnant or shrinking?

 

After that I’ll look at the wild card assets like Digit and Ki. For those I have to rely on recent arms length transactions, management communications and expert analysis to gauge what the asset is worth and could be worth in the future. If I feel the valuations are purely speculative then I may choose to ignore them. If I feel there’s real and growing value, but no earnings yet, I’ll probably come up with a pretty heavily discounted per-share value. Just making up a number for Digit and Ki, let’s say I think they’re worth $30 per share.

 

With an estimate of the predictable per-share earnings power, and a rough idea of the present value per-share of the non-earning growth assets, I feel pretty good about being able to look at the share price and decide whether a stock is a bargain or not.

 

For example, if FFH is selling for $450 per share, and for that $450 you’re able to buy $30 worth of wild card high growth assets and $70 of real, relatively predictable, annual, growing, diversified, look through earnings it’s pretty easy to see that Mr. Market isn’t serving up all that many other opportunities like that these days.

 

(And, as we value investors know, when you see opportunity you gotta be ready to act in a big way. Elephant guns.)

 

 

Agreed, but why not give them full credit for their ~74% of Digit, so more like $100/share there alone? Why discount it so heavily? b/c Indian markets running hot? What am I missing?

[Thrifty3000]

1 hour ago, MMM20 said:

Agreed, but why not give them full credit for their ~74% of Digit, so more like $100/share there alone? Why discount it so heavily? b/c Indian markets running hot? What am I missing?

I guess I didn’t make clear enough that I was just throwing out $30 as a random number for Digit and Ki - just to help make the point of how I think about wild cards. I probably should have said $X. Lesson learned. Haha.
 

TBH, I haven’t gone through the trouble of putting an actual number on Digit or Ki yet (I just remember getting excited when learning about them during the annual meeting - and realizing they could be game changers).
 

I owned a token amount of FFH for over a decade and watched closely as they fought to put together a solid non-insurance investment strategy. (I’ve written pretty extensively about their non-insurance strategy in the past).
 

I loaded up on FFH during the Covid scare while FFH was in the mid 300’s. My original thesis didn’t factor wild card assets or hard markets in at all. Those are just icing on the cake as far as I’m concerned. I originally invested based on lower earnings and growth expectations than I have now (I also expected fairly heavy stock issuance/dilution to continue - which I don’t anymore).

If FFH’s stock price ran up to maybe $1,400 per share in pretty short order (which ain’t happening, btw), that’s probably about the time I’d start taking a real hard look at the wild cards and assets like the Kennedy Wilson real estate, etc to see whether the stock was getting too far ahead of itself. Otherwise, as long as it’s priced somewhere south of $1400 per share, and it’s looking like earnings will average somewhere between $60 and $100 per share over the next 5 years, then I’m plenty happy to collect a nice div, defer taxes and hang on while book value and earnings grow. As always, I’ll expect the stock price to eventually catch up.

 

I’m perfectly happy to ride this thing out long term - as long as shorts remain off the table and the business keeps developing the way it has been in recent years.

Edited November 30, 2021 by Thrifty3000

[glider3834]

https://www.businesstoday.in/latest/story/fairfax-sells-32-stake-in-iifl-finance-for-rs-365cr-314148-2021-12-01

[wondering]

correct me if I am wrong, but I thought IIFL was held both in Fairfax Financial and Fairfax India.  If this is true, I wonder which entity sold their shares?

[glider3834]

49 minutes ago, wondering said:

correct me if I am wrong, but I thought IIFL was held both in Fairfax Financial and Fairfax India.  If this is true, I wonder which entity sold their shares?

Looks like FFH (via HWIC Asia Fund) to me & then Fairfax India would hold its IIFL Finance shares through FIH Mauritius (see below) 

 

As of September 2021, HWIC Asia Fund held 7.48 per cent stake in IIFL Finance, FIH Mauritius Investments, a subsidiary of Fairfax, owned 22.32 per cent stake in the company https://www.business-standard.com/article/markets/prem-watsa-backed-fairfax-sells-3-2-stake-in-iifl-finance-for-rs-365-crore-121120101508_1.html

[Xerxes]

here is a podcast on KW.

I haven't listened to it, but thought folks here might find it interesting.

 

Yet Another Value Podcast - Yet Another Value Blog

[glider3834]

Just a quick comment on Greece with Fairfax having significant investments there (Eurobank, Eurolife etc)

 

Greece was the second fastest growing economy in the Eurozone in 9mths YTD & fastest growing in the 3rd Quarter. Greece also recorded their highest GDP in the last decade over the Sep-21 Qtr

https://www.fortunegreece.com/article/staikouras-protathlitria-anaptixis-stin-evrozoni-to-trito-trimino-i-ellada/

 

Greece has been a long & painful road for Fairfax, but the steady flow of data now coming out in terms of GDP growth, property prices growing, increased foreign investment (Amazon. Pfizer, Microsoft to name a few), lower unemployment etc all further supports the view that things are well & truely improving for Greece and thats good news for Fairfax's banking, insurance & property businesses there.

 

Also the Greek PM & government are really doing a great job (I have to pinch myself now because  I am complimenting politicians!) but they have had a difficult task & have really made a lot of progress - they are making it much easier for foreign companies to invest in Greece & its now paying off as well as lowering taxes & other policies to encourage Greeks to return to Greece or foreign workers to move to Greece - I have now watched a few interviews with the PM & came away very impressed - & the results are starting to show in higher GDP growth etc.

 

Eurobank are also expecting Greece to have the busiest year in tourism in 20 years in 2022 based on bookings to date (provided covid doesn't flare up again!).

 

Also GDP growth over time will become less dependant on tourism (obviously big hit from covid) as Greece is seeking to expand its economy in other sectors - nearly 23% of foreign investment in Greece in 2000 was in software & IT. https://greekreporter.com/2021/07/14/foreign-investments-greece-soar-77-percent-2020/

Edited December 8, 2021 by glider3834

[Parsad]

Resolute is buying back $100M in shares on top of the 15% they've retired over the last year.  Cheers!
 

https://finance.yahoo.com/news/resolute-announces-share-repurchase-program-220000977.html

 

 

[Parsad]

Just now, Parsad said:

Resolute is buying back $100M in shares on top of the 15% they've retired over the last year.  Cheers!
 

https://finance.yahoo.com/news/resolute-announces-share-repurchase-program-220000977.html

 

 

 

There was some criticism of Prem's previous comments about Henry Singleton and Teledyne, but everything we are watching indicates that not only is Prem buying back a ton of Fairfax shares through course issuer bids and total return swaps, but Fairfax positions are also buying back massive amounts of their own stock.  Should bode well for both Fairfax and their holdings!  Cheers!

[petec]

13 minutes ago, Parsad said:

 

There was some criticism of Prem's previous comments about Henry Singleton and Teledyne, but everything we are watching indicates that not only is Prem buying back a ton of Fairfax shares through course issuer bids and total return swaps, but Fairfax positions are also buying back massive amounts of their own stock.  Should bode well for both Fairfax and their holdings!  Cheers!

+1. The “look through” buyback is immense. Just need ATCO to join in!

[glider3834]

3 hours ago, Parsad said:

 

There was some criticism of Prem's previous comments about Henry Singleton and Teledyne, but everything we are watching indicates that not only is Prem buying back a ton of Fairfax shares through course issuer bids and total return swaps, but Fairfax positions are also buying back massive amounts of their own stock.  Should bode well for both Fairfax and their holdings!  Cheers!

+1 

[Thrifty3000]

So I was talking to a friend a couple days ago who is a major Boglehead-Vanguard-fanboy. He says Vanguard just shared the highlights of its upcoming annual global outlook report (my friend swears it’s a must read).

 

Apparently Vanguard is warning that the current consensus expectation of the fed’s neutral interest rate staying in the 1.5% range over the next few years is too low. Vanguard research suggests rates will more likely land in the 2.5% range - to stave off inflation, etc.

 

“Market expectations for a terminal rate around 1.5% are more than a percentage point higher than the Fed's current federal funds rate target of 0% to 0.25%. But they're below the Fed's 2.5% neutral-rate estimate and Vanguard's 2% to 3% neutral-rate estimate.“

 

I take interest rate projections with a grain of salt, but I’m assuming higher than expected rates will likely be mitigated by FFH on the whole via higher bond portfolio earnings, while knocking fifty to a hundred million of annual earnings off of Atco’s projections (I believe Atco was assuming 1.7% rates in their projected earnings).

Edited December 9, 2021 by Thrifty3000

[glider3834]

13 hours ago, Thrifty3000 said:

So I was talking to a friend a couple days ago who is a major Boglehead-Vanguard-fanboy. He says Vanguard just shared the highlights of its upcoming annual global outlook report (my friend swears it’s a must read).

 

Apparently Vanguard is warning that the current consensus expectation of the fed’s neutral interest rate staying in the 1.5% range over the next few years is too low. Vanguard research suggests rates will more likely land in the 2.5% range - to stave off inflation, etc.

 

“Market expectations for a terminal rate around 1.5% are more than a percentage point higher than the Fed's current federal funds rate target of 0% to 0.25%. But they're below the Fed's 2.5% neutral-rate estimate and Vanguard's 2% to 3% neutral-rate estimate.“

 

I take interest rate projections with a grain of salt, but I’m assuming higher than expected rates will likely be mitigated by FFH on the whole via higher bond portfolio earnings, while knocking fifty to a hundred million of annual earnings off of Atco’s projections (I believe Atco was assuming 1.7% rates in their projected earnings).

Thrifty its good you have raised this, its something we have to factor in with ATCO - I think for Fairfax there is a hedge to this risk with Fairfax's high cash/ST invest allocation.

 

I guess the big question if Fed moves, how much to get to neutral & also how quickly will they move rates? (I haven't read Vanguard report) 

 

It looks like ATCO are forecasting avg LIBOR rate (figures from Q2'21 earnings presentation) at

0.48% for 2022 

0.96% for 2023

1.3%  for 2024

 

ATCO have $3.4 bil of variable rate credit facilities at 30 Sep-21 with fixed rate swaps on around $1 bil (rounded) of that amount. So lets say $2.4 bil of variable rate debt at risk to higher interest rates.

 

Then I would guess that if LIBOR is 1% higher than Atlas Corp's projections above(assuming it approximates Fed rate) - it would approximate to an increase in interest exp of $24 mil (using Sep-21 balance).

 

However, with new builds & deliveries, that variable debt balance would I think be higher - Thrifty you or someone else might know? 

 

Does anyone know what ATCO projecting for their variable debt balance for 2022,2023,2024 in modelling their profit forecasts? 

 

Cheers

 

 

 

 

 

 

 

 

Edited December 10, 2021 by glider3834

[Xerxes]

On 11/29/2021 at 4:18 PM, Thrifty3000 said:

 

I didn't include it because Resolute happens to be pretty far down the list in terms of carrying value. I'll be happy to edit my post and add Resolute's or any others' look through earnings that anyone wants to toss out.

 

I do prefer normal or mid-cycle earnings for cyclical investments.

 

Do you have any sense of what Resolute's "normal," mid-cycle, earnings might look like? (I know the TTM earnings have been pretty nuts.)

 

Hi

sorry for forgetting to answer. I suppose one way to see it is that the bulls are right going forward, thus the mid-cycle point would be today's snapshot, which is the average of the previous bad 5 years and forward good 5 years.

 

I think the concept of mid-cycle point is more relevant when the cycle is short-medium term. If this is a structural secular shift, than it is less relevant.

[Thrifty3000]

3 hours ago, Xerxes said:

 

Hi

sorry for forgetting to answer. I suppose one way to see it is that the bulls are right going forward, thus the mid-cycle point would be today's snapshot, which is the average of the previous bad 5 years and forward good 5 years.

 

I think the concept of mid-cycle point is more relevant when the cycle is short-medium term. If this is a structural secular shift, than it is less relevant.

Ok, so what number should we plug in for FFH’s look through earnings from Resolute?

 

(Resolute earnings * Fairfax’s ownership percentage) / 25,000,000 shares = ?

[Xerxes]

Q3:  $80 million

Q2: $268 million (is that right !)

Q1: $87 million

 

2020: $10 million

2019: $47 million

2018: $235 million

2017: $84 million (loss)

2016: $81 million (loss)

 

Not exactly the smoothest earning history. Perhaps there has been one-time losses here and there pre-pandemic, don't know the year to year history. Is it just the operating leverage kicking in with the surge in the base commodity prices dropping into the bottom line faster than they can buyback shares in the 'good years'. I think if we take $150 million per annum as an estimate, that is good enough.

 

We can ignore the share-buy back that is increasing FFH' stake overtime, and just take 40% of that $150 million as an approximation.

[Thrifty3000]

10 hours ago, Xerxes said:

Q3:  $80 million

Q2: $268 million (is that right !)

Q1: $87 million

 

2020: $10 million

2019: $47 million

2018: $235 million

2017: $84 million (loss)

2016: $81 million (loss)

 

Not exactly the smoothest earning history. Perhaps there has been one-time losses here and there pre-pandemic, don't know the year to year history. Is it just the operating leverage kicking in with the surge in the base commodity prices dropping into the bottom line faster than they can buyback shares in the 'good years'. I think if we take $150 million per annum as an estimate, that is good enough.

 

We can ignore the share-buy back that is increasing FFH' stake overtime, and just take 40% of that $150 million as an approximation.

Is that in USD?

So, shall we say Resolute = $2.40 USD (look through earnings per FFH share)?

 

That’s a pretty solid number.

[Thrifty3000]

Ok, here’s what we have so far on rough look through earnings for 11 of the common stock positions (representing a bit over half the common stock carrying value):

 

FFH Look Through

 

Atlas: $7 per FFH share

Eurobank: $6

Resolute: $2.4

Fairfax India ???: $2

BDT (Byron Trott): $1.5
CIB: $1.5

Kennedy Wilson: $1

EXCO: $1

Recipe: $1
Quess: $.50
Blackberry: $0

 

Total: $23.90 USD

Edited December 16, 2021 by Thrifty3000

[Xerxes]

$USD

[Thrifty3000]

Based on recent commentary on the Stelco board it sounds like we can conservatively pencil in, say, $.80 of look through EPS for Stelco. So, I’m updating the running list. 
 

Below are the estimated look through earnings per FFH share for 12 of the common stock positions (representing a bit over half the common stock carrying value):

 

FFH Look Through

 

Atlas: $7 per FFH share

Eurobank: $6

Resolute: $2.4

Fairfax India ???: $2

BDT (Byron Trott): $1.5
CIB: $1.5

Kennedy Wilson: $1

EXCO: $1

Recipe: $1

Stelco: $.70
Quess: $.50
Blackberry: $0

 

Total: $24.60 USD

[MMM20]

2 hours ago, Thrifty3000 said:

Based on recent commentary on the Stelco board it sounds like we can conservatively pencil in, say, $.80 of look through EPS for Stelco. So, I’m updating the running list. 
 

Below are the estimated look through earnings per FFH share for 12 of the common stock positions (representing a bit over half the common stock carrying value):

 

FFH Look Through

 

Atlas: $7 per FFH share

Eurobank: $6

Resolute: $2.4

Fairfax India ???: $2

BDT (Byron Trott): $1.5
CIB: $1.5

Kennedy Wilson: $1

EXCO: $1

Recipe: $1

Stelco: $.70
Quess: $.50
Blackberry: $0

 

Total: $24.60 USD

 

If a ~97-98% combined ratio is sustainable, then by my own calc the stock is trading at something like an ~8x normalized look-through P/E. I don't think a $1000 stock price would be unreasonable whatsoever. Agreed, Prem?!

 

Edited December 30, 2021 by MMM20

[Thrifty3000]

2 hours ago, MMM20 said:

 

If a ~97-98% combined ratio is sustainable, then by my own calc the stock is trading at something like an ~8x normalized look-through P/E. I don't think a $1000 stock price would be unreasonable whatsoever. Agreed, Prem?!

 

I think normalized $60 per share earnings is reasonable. I also think $1000 per share valuation in the next 3 to 5 years is a decent bet.