Q2 results

[Viking]

3 hours ago, nwoodman said:

 

Best to stay reasonably conservative.  Who really knows what Poseidon is worth as a highly leveraged capital-intensive business in a world with more normal interest rates.  Given their massive drop in earnings, a $400 million haircut over "fair value" doesn't sound too outrageous to me.

 

Q1 23 $50.1m vs $49.7 Q1 22

Q2 23 $6.3m vs $72m Q2 22

Q3                       $58m Q3 22

Q4                       $78m Q4 22

 

Total                    $258 FY 22

 

The earnings release had this to say

 

"Share of profit of Poseidon (formerly Atlas) decreased to $6.3 million from $72.0 million due to higher interest expense, interest rate hedging losses (compared to hedging gains in the prior year) that fluctuate quarterly, and transaction costs related to the first quarter privatization of Poseidon. The company expects Poseidon’s earnings will normalize throughout the year."

 

Hopefully, this gets discussed in the CC.  

@nwoodman Atlas has been my watch-out for a while. Unlike Fairfax, they appeared unprepared for higher rates. Head scratcher for me. I am pretty sure Eurobank had some hedges or something so they actually benefitted from higher rates early in 2022 - my thinking at the time was someone from Fairfax got to them and Eurobank got positioned properly. But Atlas… disappointing. I am not concerned. Its just a step back for the business - before they continue to move forward. Thank god they are a private company where it is much easier to take the medicine and get on with it.

[nwoodman]

1 hour ago, Viking said:

@nwoodman Atlas has been my watch-out for a while. Unlike Fairfax, they appeared unprepared for higher rates. Head scratcher for me. I am pretty sure Eurobank had some hedges or something so they actually benefitted from higher rates early in 2022 - my thinking at the time was someone from Fairfax got to them and Eurobank got positioned properly. But Atlas… disappointing. I am not concerned. Its just a step back for the business - before they continue to move forward. Thank god they are a private company where it is much easier to take the medicine and get on with it.

Very true.  It sounds like they might be doing a bit of a Wile E Coyote with the hedges having saved them for a while.  Just as long as Poseidon doesn’t become a mill stone in an otherwise compelling story.  With so many positive developments it kind of gets lost in the noise for the moment.

[MMM20]

7 hours ago, SafetyinNumbers said:

Trevor Scott pointed out that Fair Value of Associates over Carrying Value has grown to $33/share and adds it to BV to get what I’m calling adjusted book value (ABV).

  

12 hours ago, MMM20 said:

BVPS ~$834 + ~$33/share fair value excess of carrying value of associates = ~$867. 
 

Does the stock gap up to $900 tomorrow? Let’s see.

 

 

What about little old MMM20? I taught Trevor Scott everything he knows. He just has a better PR operation 

 

 

Edited August 4, 2023 by MMM20

[MMM20]

1 hour ago, nwoodman said:

Just as long as Poseidon doesn’t become a mill stone in an otherwise compelling story.

 

I thought the whole point of Poseidon locking in contractual cashflows (and missing the short term spike in spot rates) was to benefit from this exact scenario, when spot charter rates eventually crashed, as they always do! Does Poseidon not have a solid cash flow stream locked in for many years? And did they not build inflation escalators into their contracts? Thanks.

 

Edited August 4, 2023 by MMM20

[SafetyinNumbers]

2 hours ago, MMM20 said:

  

 

What about little old MMM20? I taught Trevor Scott everything he knows. He just has a better PR operation 

 

 

He specifically pointed out to me on the Twitter machine but kudos to you too!

[gfp]

10 hours ago, LC said:

Also, do we know if they have extended duration on the bond portfolio? 

 

Sounds like they are at 2.4 years average duration at quarter end.

[nwoodman]

3 hours ago, MMM20 said:

 

I thought the whole point of Poseidon locking in contractual cashflows (and missing the short term spike in spot rates) was to benefit from this exact scenario, when spot charter rates eventually crashed, as they always do! Does Poseidon not have a solid cash flow stream locked in for many years? And did they not build inflation escalators into their contracts? Thanks.

 

There appears to be some mismatch, hence the earnings cratering this quarter. It is basically the amount they missed estimates by, so it appears to be somewhat of a minor surprise in an otherwise good report.  
 

 Management is saying it is temporary.  I would defer to them.  It would be interesting to learn more via the CC  as the individual P&L’s aren’t readily available so it is a bit of a black box.  
 

The question was how much of the excess of fair value could we add to book.  If you assume nothing the answer is still OK.

[Thrifty3000]

3 hours ago, MMM20 said:

  

 

What about little old MMM20? I taught Trevor Scott everything he knows. He just has a better PR operation 

 

 

FWIW I believe the $33 per share is pre tax.

[Thrifty3000]

Prem said something important on the conference call that I hadn’t heard before…

 

He told us Fairfax is willing to buy back shares while the price is below $1375 CAD. ($1029 USD)

 

He said that number would preserve the historical relationship between price to book value per share that has compounded at over 18% long term.

Edited August 4, 2023 by Thrifty3000

[nwoodman]

7 minutes ago, Thrifty3000 said:

Prem said something important on the conference call that I hadn’t heard before…

 

He told us the max price Fairfax is willing to pay for buybacks is $1375 CAD. ($1029 USD)

 

He said that number would preserve the historical relationship between price to book value per share that has compounded at over 18% long term.

That’s brilliant.  Not dissimilar to what many here think is close to a minimum FV at the moment.  Roughly 10x’s what they think minimum earnings will be too.

 

 

[ValueMaven]

Added to my position this AM

[MMM20]

23 minutes ago, Thrifty3000 said:

He said that number would preserve the historical relationship between price to book value per share that has compounded at over 18% long term.

 

Would someone please explain this bit for the slowest among us?

 

Edited August 4, 2023 by MMM20

[Luca]

7 minutes ago, MMM20 said:

 

Would someone please explain this bit for the slowest among us?

 

Isnt he basically saying they expect book value to compound at around 18% from that value?

[Thrifty3000]

21 minutes ago, nwoodman said:

That’s brilliant.  Not dissimilar to what many here think is close to a minimum FV at the moment.  Roughly 10x’s what they think minimum earnings will be too.

 

 

I think it’s essentially following Berkshire’s buyback rule of thumb of paying up to 1.2x book value.

[nwoodman]

29 minutes ago, MMM20 said:

 

Would someone please explain this bit for the slowest among us?

 

Coming from the slowest, I take it to mean 1029/834=1.23x’s book would be the maximum price paid.  This would still be very accretive to shareholders for a compounder of 12%+ and in line with their intended aim of 15%.  I think the 18% reference is more an ‘as evidenced by our long term record”

 

Edit: just listening to the CC replay now and I am pretty sure Prem said if we were to buy back at 1375 by “year end” we would be doing our shareholders a favour, so perhaps 1.15 is more appropriate.  Average 1.2x’s

 

A very enlightening comment nonetheless

Edited August 4, 2023 by nwoodman

[Thrifty3000]

24 minutes ago, Luca said:

Isnt he basically saying they expect book value to compound at around 18% from that value?

Their stated goal is to compound book value by 15%. It sounds like they assume the stock price will sustain at least 1.2x book over the long term. So buying back at below 1.2x book will benefit shareholders (relative to book value).

 

I don’t think they are committing to 18% long term per share growth. However, 18% can be achieved if they allocate capital exceptionally well, which can include buying back shares at a discount to intrinsic value.

 

Currently the share price is 20% below their buyback threshold, however, they are choosing to invest in growth rather than buy back shares. That indicates they believe they can deploy capital at returns of at least 15%, which is a great sign.

 

Fairfax is in the ultimate investor catbird seat and we’re enjoying the ride. (This is easily the most exciting ride of my 2 decade investment career. I’ve never had this much conviction in a long term opportunity.)

 

Edited August 4, 2023 by Thrifty3000

[UK]

https://seekingalpha.com/article/4624021-fairfax-financial-holdings-limited-frfhf-q2-2023-earnings-call-transcript

 

And Tom, one other point on the buying back. In our annual report we said that our book value per share grew at 18.8% from inception compounded at 18.8%. Our stock price sometimes compounds above and sometimes below. Well at the end of 2022 we said what stock price Canadian dollars would make the book value compound and the stock price compound the same? And that number we put in our annual report was CAD 1375 1-3-7-5. That just makes it same. Book value is our first indication. Our book value we think is very understated and our book value -- our intrinsic value which I'll leave you guys to estimate is worth a lot more than the book value. But that's how we look at it. So at the end of the year CAD 1375, if we can buy our shares we think we're doing all shareholders that we're doing well by all shareholders by buying back the stock. Fran, next question?

 

Edited August 4, 2023 by UK

[Thrifty3000]

Aha, here is the exact statement from the annual report. He didn't specify that $1,375 was the buyback bogey. Today's statement that $1,375 is the bogey is new, important, news...

 

"Over our 37 years, excluding dividends, we have compounded book value by 17.8% annually and our stock price has compounded by 16.1% annually. Over these 37 years, there are only 55 companies of the 6,000 companies listed in 1985 on the U.S. exchanges (NYSE, NASDAQ and American) – i.e., only 1% – that have had an annual return above 15%.

 

For our stock price to match our book value’s compound rate of 17.8%, our stock price in Canadian dollars should be $1,375. And our intrinsic value exceeds book value, a principal reason being that our insurance companies generate huge amounts of float at no cost. This is the reason we continue to buy back our shares as we continue to think they are very cheap."

[Luca]

6 minutes ago, Thrifty3000 said:

For our stock price to match our book value’s compound rate of 17.8%, our stock price in Canadian dollars should be $1,375. And our intrinsic value exceeds book value, a principal reason being that our insurance companies generate huge amounts of float at no cost. This is the reason we continue to buy back our shares as we continue to think they are very cheap."

Got it

[MMM20]

Thanks! So here's my follow up question. Given Prem's statement today, why wouldn't FFH go to CAD 1,375 almost immediately? The Prem put...

[StubbleJumper]

24 minutes ago, Thrifty3000 said:

Aha, here is the exact statement from the annual report. He didn't specify that $1,375 was the buyback bogey. Today's statement that $1,375 is the bogey is new, important, news...

 

"Over our 37 years, excluding dividends, we have compounded book value by 17.8% annually and our stock price has compounded by 16.1% annually. Over these 37 years, there are only 55 companies of the 6,000 companies listed in 1985 on the U.S. exchanges (NYSE, NASDAQ and American) – i.e., only 1% – that have had an annual return above 15%.

 

For our stock price to match our book value’s compound rate of 17.8%, our stock price in Canadian dollars should be $1,375. And our intrinsic value exceeds book value, a principal reason being that our insurance companies generate huge amounts of float at no cost. This is the reason we continue to buy back our shares as we continue to think they are very cheap."

 

No.  My sense is that Prem was being sloppy in that comment.  The argument is that at some point in 1986 market price was "fair" and that since then BV has increased by a ridiculous amount and sometimes the stock price has tracked BV and sometimes it hasn't.  But if market price had tracked BV perfectly, then somehow CAD$1375 would be a "fair" price today.  Okay, the point is interesting, but I doubt very much that Prem holds the view that IV is $1375, and I doubt very much that he would approve of a share re-purchase during 2023 at a price as high as CAD$1375.  But, sloppy or not, it certainly was what he said.

 

More broadly, I liked Prem's approach to the Q&A on today's call.  In the past, analysts would pose a question, and in response they would get what I call the "Prem fuddle" as he didn't really answer the question and nobody would gain any insight at all from the question.  I have stated on several occasions that I wished he would pass the question to one of the other conference call participants to answer and then perhaps after the answer, Prem could chip in his own two-bits.  Well that's pretty much exactly what he did today, and we generally heard cogent and clear replies to the questions being asked.  Unfortunately, he should have relied on Jen Allen or someone to respond to the buyback question rather than replying the way he did.

 

 

SJ

[MMM20]

@StubbleJumper idk… i think he pretty much said he’d like to buy back stock up to $1375 this year, which in his mind is still a significant discount to IV (which he’ll leave us to calculate for ourselves). He just told us he thinks the incremental ROIC on a purchase up to that price would be 15%+. Maybe he spoke out of turn or said too much, but idk how else to interpret it. I think IV is $2000+ as youd expect to earn a fair ~10-12% return from that point, but I’m a broken record and that’s a whole nother can of worms.

 

Edited August 4, 2023 by MMM20

[Santayana]

53 minutes ago, StubbleJumper said:

Okay, the point is interesting, but I doubt very much that Prem holds the view that IV is $1375

I feel certain that he thinks IV is far higher than 25% above BV, which he says he thinks is understated.

 

[Parsad]

I wouldn't get too tangled up regarding where he would do buybacks.  It's a changing target as book increases each year.  Just note that when FFH is at opportune prices, he will do buybacks going forward instead of simply looking elsewhere.  Cheers!

[Tommm50]

I check the FRFHF stock price on the WSJ website. They also list the stock movement of 6 competitors (including Chubb and Berkley). All those competitors are negative today, from half a percent to almost two percent. Fairfax is up over four percent. Nice to see.

 

I'm guessing it's the much greater impact for other insurers of "mark to market" losses on their bond portfolios.