Jump to content

Fairfax Valuation


Viking
 Share

Recommended Posts

What a crazy year it has been. Given the great news on the vaccine front the fog is starting to lift in terms of the economy and its future prospects. What are investors estimates for what Fairfax should earn in 2021, 2022 and 2023 (the next 3 years)? To get the discussion going i think the estimate put forward by Chris Mayer of Woodlock House Family Capital is a good place to start: 95% CR + 5% return on investments = stock trading at BV. (His comments are from Sept 2019 when the stock was trading in the US $440 range). If Fairfax delivers (especially on the investment side of the ledger) and investor sentiment (confidence in management) improves we may see the multiple expand to 1.1 or even 1.2 of BV. 

Bottom line, Fairfax continues to look cheap trading at US $458 and BV at $478. Q1 earnings should boost BV to around $500 ($10 dividend payment was paid in Q1 so my guess is BV could increase $30).

Looking ahead a couple of years, Fairfax looks as well positioned to hit  95% CR as it ever has given the hard market. And its equity investments do not look overvalued at current price levels (when taken as a whole) so a 5% average return on the investment portfolio also looks doable moving forward.

—————————-

“Moreover, I think the assets collectively could generate a ~10%-type ROE. Watsa has made a public goal of hitting 15%... He says a 95% combined ratio and a 7% return on FFH’s investments gets to a 15% ROE. 

But in a low-interest rate environment, and given a large bond portfolio, a 7% return seems unlikely. But possible. Sustaining a double-digit ROE is key. (FFH can reach 10% by following a number of roads. For example, one road requires a ~95% combined ratio and ~5% return on its portfolio. That seems do-able.)

Anyway, a consistent 10% would grow book value at a decent clip and then you’d likely get an additional lift from the valuation even if the stock moved just to 1.2x book. As RayJay reports, a comparable set of North American insurers with an 11% ROE trades for 1.7x book value per share.”

https://www.woodlockhousefamilycapital.com/post/the-horse-story

Edited by Viking
Link to comment
Share on other sites

‘We expect to compound our mark-to-market book value per share over the long term by 15% annually’

Quoted from the opening line of the annual report and previously stated Fairfax objective. 

How can investors hold this investment if they doubt that this is achievable?

(I do and with the current set-up expect to see them achieve/exceed this objective over the next few years).

Link to comment
Share on other sites

7 hours ago, FairFacts said:

How can investors hold this investment if they doubt that this is achievable?

I don't think this has anything to do with whether I hold the shares. 

What I care about is what *I* think Fairfax can achieve, and whether this is in the price.

My guess is they can do around 15% in this hard market and given current investment positioning, and more like 10% through the cycle given current bond yields.

I don't think the stock is dirt cheap any more, especially on tangible book value. My view on the goodwill is that it is money good (i.e. if FFH sold any of the insurance subs, they would be able to do so at a price that justified the goodwill) but that it distorts comparisons. If you're comparing with a basket of peers, I think it is probably best to use tbv.

That said, 15% ROE drives a spectacular ROTE, so tbv is going to grow very fast over the next few years if we are right about the hard market and investment potential.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...