Q3 results

[StubbleJumper]

@VikingThanks for the reply.  I worry that you are misinterpreting cautious optimism and cautious enthusiasm with bearishness.  There are four or five posters on this forum who have been wildly enthusiastic about FFH's last couple of years and have equal optimism about the next couple of years, but prefer not extrapolating that out too far!

 

1) and 2)  It is always possible that we will see a 95 or 96 CR and treasuries yielding 4-5% over the next five years.  But, if you return to the content of Prem's annual letter to shareholders and examine the history of CRs and sovereign debt rates, you will probably find that simultaneous profitable underwriting AND solid treasury yields is an exceptional circumstance.  It's a circumstance that has made FFH a nice pile of money over the past year or so, and hopefully will continue to do so during 2024 and 2025.  But that table depicting cost/benefit of float and bond rates reflects the competitive dynamics of the industry.  The the financing differential (bond yield less the cost of float) widens out, capital has historically poured into the industry and profits tend to be competed away through lower underwriting standards.  The current financing differential is roughly 11% (ie, benefit of float is ~6% in 2023 due to a 94 CR, and prevailing sovereign debt rates are ~5%), which is more than double the long-term average.  Personally, I expect to see some reversion to the mean, but I am hoping that it doesn't happen too soon!

 

3) No, compounding isn't dead at all.  The only reason why anyone would be a long-term FFH shareholder is the belief in compounding.  I'm not sure that I'd assume that FFH will get a 10% return on the earnings that it reinvests, but there will definitely be some sort of return.  Prem publishes a table in his annual letter that describes FFH's investment returns, and there have been a few periods with that kind of return, but it's exceptional which is consistent with the lumpy-returns mantra.

 

Nobody is assuming that FFH management will suddenly get stupid.  But, equally, the assumption needs to be made that other companies' management teams don't become stupid either.  FFH is making lots of money in a hard market and when the ROE eventually turns due to a softening it's not because they have become stupid.  It's because everyone else has been competing furiously for premium.

 

 

SJ

[Viking]

55 minutes ago, StubbleJumper said:

@VikingThanks for the reply.  I worry that you are misinterpreting cautious optimism and cautious enthusiasm with bearishness.  There are four or five posters on this forum who have been wildly enthusiastic about FFH's last couple of years and have equal optimism about the next couple of years, but prefer not extrapolating that out too far!

 

1) and 2)  It is always possible that we will see a 95 or 96 CR and treasuries yielding 4-5% over the next five years.  But, if you return to the content of Prem's annual letter to shareholders and examine the history of CRs and sovereign debt rates, you will probably find that simultaneous profitable underwriting AND solid treasury yields is an exceptional circumstance.  It's a circumstance that has made FFH a nice pile of money over the past year or so, and hopefully will continue to do so during 2024 and 2025.  But that table depicting cost/benefit of float and bond rates reflects the competitive dynamics of the industry.  The the financing differential (bond yield less the cost of float) widens out, capital has historically poured into the industry and profits tend to be competed away through lower underwriting standards.  The current financing differential is roughly 11% (ie, benefit of float is ~6% in 2023 due to a 94 CR, and prevailing sovereign debt rates are ~5%), which is more than double the long-term average.  Personally, I expect to see some reversion to the mean, but I am hoping that it doesn't happen too soon!

 

3) No, compounding isn't dead at all.  The only reason why anyone would be a long-term FFH shareholder is the belief in compounding.  I'm not sure that I'd assume that FFH will get a 10% return on the earnings that it reinvests, but there will definitely be some sort of return.  Prem publishes a table in his annual letter that describes FFH's investment returns, and there have been a few periods with that kind of return, but it's exceptional which is consistent with the lumpy-returns mantra.

 

Nobody is assuming that FFH management will suddenly get stupid.  But, equally, the assumption needs to be made that other companies' management teams don't become stupid either.  FFH is making lots of money in a hard market and when the ROE eventually turns due to a softening it's not because they have become stupid.  It's because everyone else has been competing furiously for premium.

 

SJ

@StubbleJumper we are not that far apart. I do appreciate the opportunity to discuss and debate. I sometimes will take a bit of an extreme view to create the opportunity for push back. 
 

I wonder if we are going to learn that Fairfax was criminally under earning on its assets from 2010-2020. And that its earnings power is much higher than anyone imagined. Which just means the returns being generated today are not as abnormally high as they look. Just a theory… we will know more in a few years. 
 

i also wonder what the value of active management is today (in terms of alpha - returns in excess of a benchmark). Howard Marks comments in his most recent memo that cost of capital matters again - it didn’t from 2008-2021. Another theory i have is the alpha being delivered by Fairfax’s management team is much higher than investors realize. They look ideally positioned to benefit from the current high interest rate / volatility environment - and much better than peers (including BRK). Again, we will know more in a few years.

I also wonder about the quality of the underwriting and the insurance business. It looks to me like Fairfax might be slowly moving up the quality scale (compared to peers). Not elite. But better than they were. Another crazy theory. 

 

All three ‘theories’ likely impact my view of Fairfax’s earnings potential over the next 5 years. We will see. 

Edited November 11, 2023 by Viking

[Viking]

3 hours ago, vinod1 said:

 

If normalized earnings for Fairfax this year are $150 per share. Then these earnings must be growing at least at about 5% annually. That means, Fairfax should be able to easily earn $2000 per share in aggregate over the next 10 years. You cannot exclude any "one time" losses, this would be all in.

 

That would be the definition of what normalized earnings would mean.

 

Personally, I would be thrilled if this happens, but I think this is unlikely. 

@vinod1 with earnings growth of 5% are you not essentially saying Fairfax’s capital allocation will be poor moving forward? 
 

Part of the reason I am so optimistic on Fairfax today is:

1.) the cash flows are front loaded. We know with a fairly high confidence level that they are going to deliver record operating earnings 2023-2025. Buffett teaches us when valuing a company the TIMING of future cash flows is exceptionally important (the sooner the better - the higher the valuation a company should get).

2.) the opportunity set to deploy capital is very good today and i suspect is about to get even better: and Fairfax has +$3.5 billion that will be re-invested each year moving forward in a very good investment environment. Bond yields are at 15 year highs. Small cap stocks are trading at bear market lows. If we get a recession all equities will go on sale (and already cheap equities will get stupid cheap). When it comes to capital allocation today, Fairfax is like a major league hitter getting lobbed softballs.
 

As a result, I will be surprised if earnings growth is 5% per year moving forward.

 

You also bring up ‘one time’ losses. Fairfax’s results will be volatile. Especially if we get a recession (no idea if this happens). My view is volatility is a good thing for Fairfax - smoothing results out over a couple of years.

• The TRS-FFH purchase in late 2020/early 2021 is a great example. They masterfully took advantage of extreme volatility in Fairfax shares - extreme pessimism.
• Another great example was selling corporate bonds and shifting to government bonds and shortening duration to 1.2 years in late 2021. They sold at the top of the fixed income bubble.
• The extension of their fixed income portfolio to 3.1 years in October looks exceptionally well timed.
• Selling Resolute at the top of the lumber cycle? Brilliant.
• Selling pet insurance for $1.4 billion…. Nuts. Lots of these decisions are $1 billion decisions… they are ‘needle movers’ for Fairfax and its shareholders.

Fairfax investors fear volatility. I think they might have it backwards. Especially given how Fairfax is positioned today (strong balance sheet and record operating earnings). Investors in Fairfax should be praying for volatility. With both insurance and financial markets. Thriving in volatile markets - this looks to me like it is likely a significant competitive advantage for Fairfax today compared to peers.

Edited November 11, 2023 by Viking

[vinod1]

3 hours ago, Viking said:

@vinod1 with earnings growth of 5% are you not essentially saying Fairfax’s capital allocation will be poor moving forward? 
 

Part of the reason I am so optimistic on Fairfax today is:

1.) the cash flows are front loaded. We know with a fairly high confidence level that they are going to deliver record operating earnings 2023-2025. Buffett teaches us when valuing a company the TIMING of future cash flows is exceptionally important (the sooner the better - the higher the valuation a company should get).

2.) the opportunity set to deploy capital is very good today and i suspect is about to get even better: and Fairfax has +$3.5 billion that will be re-invested each year moving forward in a very good investment environment. Bond yields are at 15 year highs. Small cap stocks are trading at bear market lows. If we get a recession all equities will go on sale (and already cheap equities will get stupid cheap). When it comes to capital allocation today, Fairfax is like a major league hitter getting lobbed softballs.
 

As a result, I will be surprised if earnings growth is 5% per year moving forward.

 

You also bring up ‘one time’ losses. Fairfax’s results will be volatile. Especially if we get a recession (no idea if this happens). My view is volatility is a good thing for Fairfax - smoothing results out over a couple of years.

• The TRS-FFH purchase in late 2020/early 2021 is a great example. They masterfully took advantage of extreme volatility in Fairfax shares - extreme pessimism.
• Another great example was selling corporate bonds and shifting to government bonds and shortening duration to 1.2 years in late 2021. They sold at the top of the fixed income bubble.
• The extension of their fixed income portfolio to 3.1 years in October looks exceptionally well timed.
• Selling Resolute at the top of the lumber cycle? Brilliant.
• Selling pet insurance for $1.4 billion…. Nuts. Lots of these decisions are $1 billion decisions… they are ‘needle movers’ for Fairfax and its shareholders.

Fairfax investors fear volatility. I think they might have it backwards. Especially given how Fairfax is positioned today (strong balance sheet and record operating earnings). Investors in Fairfax should be praying for volatility. With both insurance and financial markets. Thriving in volatile markets - this looks to me like it is likely a significant competitive advantage for Fairfax today compared to peers.

 

1. Regarding 5% annual growth in earnings, I low balled this on purpose to show how much earnings have to be over the next decade even at such a low growth rate. If I assume 15% growth rate, they would have to generate earnings of about $3500 in the next 10 years if normalized earnings are $150 today and they can reinvest these earnings at returns comparable to what they get on current book. 

 

Looking at earnings from associates, they are carried around $5.5 billion and earnings to Fairfax right now are $1.1 billion. 20% earnings yield. I truly did not dig deep into any of these associates to form a strong view, but to me they are more likely cyclical highs. 

 

2) I do not disagree with any of your other arguments. Yes they did good. 

 

But.

 

I suspect almost everyone on this board would disagree with this: the role of luck. Assume covid never happened, where do you think Fairfax would have been? It would still be doing much better than in the past. Nearly half of the earnings power increase was from the side effects of Covid - the shock, monetary response, the inflationary follow up and the interest rate response. If instead, let us say Covid did not happen, we still have zero interest rates, then where would Fairfax earnings power have been? Many of the things you mentioned as brilliant would not have occurred. We would still be bitching about Prem.  

 

StubbleJumper wrote better than anything I could write, but my view is almost identical. 

 

These couple of years are the confluence of almost everything that can go right going right. I suspect that would not be a good baseline to hang our hat on for the next 10 years. 

 

This is my largest holding by far, I had to break every self imposed maximum position limits to avoid selling. I wish nothing more than for you to be right!

 

3) Volatility is good for Fairfax, always has been, and for us. No disagreement there. 

 

Vinod

 

[glider3834]

one potential driver of future earnings will be future additional impact on EPS if/when they acquire additional shares from minority interests in Odyssey, Brit, Allied - as premium growth slows & they can build excess capital in subs, they should be in better position to generate cash to pay divs to holdco &/or buy out minority interests IMHO

 

 

 

 

Edited November 12, 2023 by glider3834

[UK]

On 11/10/2023 at 11:45 PM, Spekulatius said:

Complexity is an issue that reduces valuations in general. A simple business will be valued higher than a complex business, all else being equal.

 

What @SafetyinNumbers call social numbers is what Aswath Damadoran call’s the story. I think the story is getting better with FFH but as an insurance holding stock, it is unlikely to even become a stock that has much of a story value.

 

I am really not expecting this or counting on this...but stranger things have happened and it a lot of cases complexity, especially if that was a story of some geniuses being involved, was enabler and even necessary to justify nonsensical valuations or earnings projections:)

 

Isn't the most important things driving story value are story telling itself, but even more importantly, price action of the stock? 

 

As with FFH (or insurance more broadly at the time?) this "story" story also happened once. Of course, lets stay conservative: maybe 1.5-1.7 BV would be all right / enough for the next (this?) time:)

 

Edited November 12, 2023 by UK

[steph]

Very interesting discussion. Thx! 

Whatever the outcome in 5 or 10 years, Fairfax is today a quite unique risk/return investment.  Investing is about probabilities.  With Fairfax today you have a bond portfolio consisting of mostly AAA paper and some other quite secure income that will give you 10% for at least the next 3 to 4 years and probably longer. You can buy this at book and all the rest is optionality : good combined ratios/Eurobank/Digit/buying back minorities/ even higher interest rates/ good reinvestments of all this cash coming in/ rerating to a higher price to book….and many more possible surprises. 

In my eyes, for the next 5 years a certain 10%, a high probability 15% and why not even a good chance of even higher returns (if the market falls in love again with Prem ).

[glider3834]

6 hours ago, vinod1 said:

suspect almost everyone on this board would disagree with this: the role of luck. Assume covid never happened, where do you think Fairfax would have been? It would still be doing much better than in the past. Nearly half of the earnings power increase was from the side effects of Covid - the shock, monetary response, the inflationary follow up and the interest rate response. If instead, let us say Covid did not happen, we still have zero interest rates, then where would Fairfax earnings power have been? Many of the things you mentioned as brilliant would not have occurred. We would still be bitching about Prem.

I wrote a bit a long winded reply but main point I would say is that we have to give Fairfax credit for their fixed income mgmt - luck plays a role but you have to put yourself in a position to take advantage - they saw more value in the optionality of holding cash over stretching for the limited yield on offer.

Edited November 12, 2023 by glider3834

[MMM20]

Sovereign bonds were an all time bubble. Yields were insanely low - like at 5,000 year lows. You were not getting compensated for taking duration risk. Yes, this was obvious at the time. We just had no idea how long it would go on. In that sense, FFH’s short duration was just another old school mean reversion value investment - things were so stretched and historically insane at that time that if it wasn’t covid, it probably would’ve been something else within that rough sort of timeframe. There’s always something that people point to as the "trigger" to create an obvious and coherent narrative in retrospect, but we are really always dealing with probabilities of future states of the world - and I'll never be convinced that the probabilities weren't heavily skewed against rates being pinned to the zero bound for another decade. IMHO, the lucky ones were really the other guys who kept going hard into long duration in bonds and equities all the way up (down?) - that they haven’t gotten blown up even worse!
 

20 years sounds like a long time to base your historical analysis, but maybe not if more than half of those years were an all time crazy interest rate environment. The market is still anchored to that crazy environment in a bunch of ways, one of which is looking at Fairfax’s performance then and expecting reversion to that. So I think the big picture counterpoint is that maybe we are still bouncing off an all time insanely low point for fundamentals and sentiment. Maybe we are still less than halfway through the correction.

 

I would also just point out that float has grown so much that IMHO we can expect through the cycle to make ~$70-90+/share pretax just from ~500-600 bps spread between fixed income and underwriting profitability (call it 4-5% vs ~99% combined). So IMHO we are at a fair ~10-12x pretax earnings on that piece alone, ie if you assume almost zero contribution (like a ~2% annualized return) from their ~$20B ish equity portfolio to offset overheads. That’s fair now? I would argue something like ~8% is reasonable if not conservative on their total equity portfolio now. And that puts us at high single digits normalized p/e, like ~8-9x - with zero credit from the "windfall" of ~1000 bps spreads between underwriting and fixed income returns, for however long that lasts.

I personally would also expect them to pull another pet insurance rabbit out of their hat, I agree with Quincy Lee that Eurobank could easily be a ~2-3x over 3-5 years, and I wouldn’t be surprised if Digit is a ~$10-20B company in 3-5 years. So we’ve got those sorts of upside risks too - it's hard to be super bullish on FFH without being bullish those chunky investments, which are super additive to my own portfolio diversification.
 

Again, I am probably too bullish, but I don’t think we should weight the ~2010-2020 experience very heavily at all looking forward, and every reasonable pushback on this one seems to be some version of that. 
 

Edited November 13, 2023 by MMM20

[SafetyinNumbers]

6 hours ago, UK said:

 

I am really not expecting this or counting on this...but stranger things have happened and it a lot of cases complexity, especially if that was a story of some geniuses being involved, was enabler and even necessary to justify nonsensical valuations or earnings projections:)

 

Isn't the most important things driving story value are story telling itself, but even more importantly, price action of the stock? 

 

As with FFH (or insurance more broadly at the time?) this "story" story also happened once. Of course, lets stay conservative: maybe 1.5-1.7 BV would be all right / enough for the next (this?) time:)

 

 

I would argue that with passive being much greater competition for active managers than ever before, the move has the potential to be even more pronounced. As long as BV is growing at a healthy rate, the multiple will keep expanding. IFC trades at ~2.5x BV based on a ~13% ROE average for the past 10 years. It’s BV hasn’t grown this year but it’s expected to resume so it’s kept it’s multiple so far. For Fairfax, expectations are relatively low for forward BV growth (10% at 1x?) despite all of the evidence to the contrary. 

[vinod1]

15 hours ago, SafetyinNumbers said:

I did the math and it’s just under $2000/sh after accounting for the dividend unless I screwed it up.

 

@vinod1 where would you set the odds on book value being > $2777 (current BV + 2000 - dividends) in exactly 10 years and where would you set the over/under on BV in 10 years?

 

The way I see it, for the first time in more than a decade, Fairfax has a path to 10% book value growth doing nothing much or anything risky. Anytime you have such a path, there would be an improvement in P/BV. So there you have a high probability of good returns. 

 

There might be some opportunities, good luck, etc. that could more than balance out any negative shocks, bad luck, etc. 

 

No need to go Cathy Woodish on Fairfax assuming everything that can go right would do so and then some. This is P&C business at heart, not a wide moat business. So competitive pressures would have an impact. When, how, etc. are hard to foresee but reasonable to assume there would be some.

 

Vinod

[vinod1]

4 hours ago, glider3834 said:

I wrote a bit a long winded reply but main point I would say is that we have to give Fairfax credit for their fixed income mgmt - luck plays a role but you have to put yourself in a position to take advantage - they saw more value in the optionality of holding cash over stretching for the limited yield on offer.

 

Absolutely, Fairfax deserves credit. They behaved exactly what I thought many others should have behaved. 

 

My point is the returns were helped by luck. Pandemic had been a huge boon. So dont just bake  "normalized luck" into earnings figures into the future. 

 

Vinod

[Gregmal]

13 minutes ago, vinod1 said:

 

The way I see it, for the first time in more than a decade, Fairfax has a path to 10% book value growth doing nothing much or anything risky. Anytime you have such a path, there would be an improvement in P/BV. So there you have a high probability of good returns. 

 

There might be some opportunities, good luck, etc. that could more than balance out any negative shocks, bad luck, etc. 

 

No need to go Cathy Woodish on Fairfax assuming everything that can go right would do so and then some. This is P&C business at heart, not a wide moat business. So competitive pressures would have an impact. When, how, etc. are hard to foresee but reasonable to assume there would be some.

 

Vinod

I totally agree with this take. I added for the first time since high $400s the day before earnings. The inclination was always to sell this thing but when I’d step back and look at the facts it just seemed like a given this is setup for 10%+ for at least the next 3-5 years assuming all else equal.

[MMM20]

2 hours ago, vinod1 said:

No need to go Cathy Woodish on Fairfax

I hope we can all agree that ~100-200x sales probably isn’t fair for Fairfax (maybe Digit )… but hey maybe ~16x normalized p/e or something like ~US$2000? 
 

My sense is many investors are reluctant to believe that can be true when the stock is already a ~3x in ~3 years or whatever it is exactly. We should stand to benefit.
 

 

Edited November 12, 2023 by MMM20

[dealraker]

You guys have mostly read history and probably done so with some degree of intensity.  Ole dealraker who began his working career in 1977 as an insurance and banking analyst (yea "newbie" analyst LOL) has literally experienced it, lived it with his investments!  Decades of owning these things that a somewhat smaller group of people find charming to some degree or another.  Here's my view (a wild-ass guess of course), I'm a probability type LOL...and this is for let's say the next 3 years:

 

3% chance Prem and Co get a renewed (from the 1990's) "Buffett of the North" designation...and a 1.7, 1.8...up to 2.5 times or more price to book.  A blow up of some other investor obsession could lead to a likely short but euphoric love of Fairfax.  Yes people, this stuff does happen.  And you, that's none of you, have any chance of predicting it with any degree of success much.

 

30% chance of sub 8 times earnings price, yes less than book value.  Yes, insurance/reinsurance is what it is...a disaster waiting to happen.

 

67% chance we mess around book or slightly above for some time and go with the flow from here.

 

And believe it or not, not included on this 3-some list above is some sort of pretty serious awful thing that shoves all three above into the trash heap!

 

Yep, that's my guess!  What's that worth?  Whut ya pay fer it...that's what it is worth!

[MMM20]

On 11/12/2023 at 9:45 AM, dealraker said:

Yes, insurance/reinsurance is what it is...a disaster waiting to happen.

 

I guess two things can be true.

 

https://hiddenvaluegems.com/on-markets-investing/tpost/8v4518sn71-best-industry-for-building-wealth

 

What industry is responsible for creating the most significant financial wealth?

The most common answer would be Technology. At least, it appears so if you measure wealth by the number of millionaires or billionaires created in a particular sector. Definitely, in the past 30 years.

However, if you add the number of people who have tried but failed in IT, the ratio becomes less favourable. If you also track the wealth of “investors” rather than the “founders”, I am afraid the results could be even more disappointing.

I had a different sector in mind. It is the one that encourages long-term thinking and narrow expertise, is rather dull and is not growing at a double-digit rate. In fact, running this business was quite a tough job in the past decade. However, companies run by managers with skin in the game and excellent capital allocation skills have done phenomenally well over many decades.

This sector is insurance. Considered a boring sector, it helped some shrewd operators amass wealth over many decades.

 

Edited November 13, 2023 by MMM20

[SafetyinNumbers]

1 hour ago, dealraker said:

You guys have mostly read history and probably done so with some degree of intensity.  Ole dealraker who began his working career in 1977 as an insurance and banking analyst (yea "newbie" analyst LOL) has literally experienced it, lived it with his investments!  Decades of owning these things that a somewhat smaller group of people find charming to some degree or another.  Here's my view (a wild-ass guess of course), I'm a probability type LOL...and this is for let's say the next 3 years:

 

3% chance Prem and Co get a renewed (from the 1990's) "Buffett of the North" designation...and a 1.7, 1.8...up to 2.5 times or more price to book.  A blow up of some other investor obsession could lead to a likely short but euphoric love of Fairfax.  Yes people, this stuff does happen.  And you, that's none of you, have any chance of predicting it with any degree of success much.

 

30% chance of sub 8 times earnings price, yes less than book value.  Yes, insurance/reinsurance is what it is...a disaster waiting to happen.

 

67% chance we mess around book or slightly above for some time and go with the flow from here.

 

And believe it or not, not included on this 3-some list above is some sort of pretty serious awful thing that shoves all three above into the trash heap!

 

Yep, that's my guess!  What's that worth?  Whut ya pay fer it...that's what it is worth!

 

If Fairfax wasn't the 30th biggest weight in the S&P/TSX, it would be harder to disagree with your odds. The narrative will be around Buffett of the North, or India or Greece or Digit or something we don't know about yet but the mechanism is based on how active equity strategies are managed. I think those 3% odds are over 50% if Fairfax executes and given the set up, I don't think it's that big an if. 

[StubbleJumper]

1 hour ago, dealraker said:

3% chance Prem and Co get a renewed (from the 1990's) "Buffett of the North" designation...and a 1.7, 1.8...up to 2.5 times or more price to book.  A blow up of some other investor obsession could lead to a likely short but euphoric love of Fairfax.  Yes people, this stuff does happen.  And you, that's none of you, have any chance of predicting it with any degree of success much.

 

30% chance of sub 8 times earnings price, yes less than book value.  Yes, insurance/reinsurance is what it is...a disaster waiting to happen.

 

67% chance we mess around book or slightly above for some time and go with the flow from here.

 

 

I think you are being very generous on your 3% chance of the world falling in love with FFH and bidding it up to 1.7x, 1.8x or 2.5x BV.  A family-controlled Canadian company with a dual-class share structure that isn't even listed in New York?  There's not a lot of love for those!  It would require a sea change in sentiment to drive that outcome in three years.

 

I agree that there's a meaningful likelihood that it could trade for less than book in three years.  It's not the most likely scenario, but it has happened often enough to FFH that we shouldn't discount that potential.  And,other family-controlled Canadian companies have experienced long periods of this sort of thing.  I would suggest that the likelihood of this is less than the 30% that you've posited, but there's still a meaningful chance that it could happen.

 

The most likely scenario is that FFH trades between 1x and 1.2x adjusted BV.  And, frankly, for me that would be perfectly fine.  Chances are that FFH will grow its BV by 40%+ over the next three years, so even if it trades at 1x BV in three years (effectively no growth in valuation) it'll likely be a perfectly acceptable return.  But, if we get a bit of luck and it trades at 1.2x a book value that has grown 40% over the next three years, then you're looking at quite a nice little return...

 

 

SJ

 

 

[glider3834]

this article is relevant to discussion on valuation 

https://www.insidepandc.com/article/2cdgrj2sqw8zb25mjo2yo/specialty-lines/ipc

 

 

[MMM20]

14 minutes ago, glider3834 said:

this article is relevant to discussion on valuation 

https://www.insidepandc.com/article/2cdgrj2sqw8zb25mjo2yo/specialty-lines/ipc

 

 

[dealraker]

6 hours ago, StubbleJumper said:

 

I think you are being very generous on your 3% chance of the world falling in love with FFH and bidding it up to 1.7x, 1.8x or 2.5x BV.  A family-controlled Canadian company with a dual-class share structure that isn't even listed in New York?  There's not a lot of love for those!  It would require a sea change in sentiment to drive that outcome in three years.

 

I agree that there's a meaningful likelihood that it could trade for less than book in three years.  It's not the most likely scenario, but it has happened often enough to FFH that we shouldn't discount that potential.  And,other family-controlled Canadian companies have experienced long periods of this sort of thing.  I would suggest that the likelihood of this is less than the 30% that you've posited, but there's still a meaningful chance that it could happen.

 

The most likely scenario is that FFH trades between 1x and 1.2x adjusted BV.  And, frankly, for me that would be perfectly fine.  Chances are that FFH will grow its BV by 40%+ over the next three years, so even if it trades at 1x BV in three years (effectively no growth in valuation) it'll likely be a perfectly acceptable return.  But, if we get a bit of luck and it trades at 1.2x a book value that has grown 40% over the next three years, then you're looking at quite a nice little return...

 

 

SJ

 

 

I'm being somewhat silly of course given the history of FFH valuation.  To be honest while I didn't understand exactly what Prem and management was up to (and honestly didn't much care either) I not once came close to considering selling the stock.  Luckily I'm reading COBF of course as I was distracted.  I continually figured a new cycle and new story would come, just no clue when.  But being on the forum I got it - the new story - delivered in mass.  

 

 

Edited November 12, 2023 by dealraker

[Gregmal]

Isn’t the story a whole lot simpler? 
 

-This is a business that generally produces acceptable returns.

 

-We are in a macro environment where this type of business should produce better than average returns.

 

-We are still being punished for the sins of a company and macro situation that really doesnt exist anymore.

 

Thats all you need for massive outperformance, and it’s already showing up. 

Edited November 12, 2023 by Gregmal

[Thrifty3000]

36 minutes ago, Gregmal said:

Isn’t the story a whole lot simpler? 
 

-This is a business that generally produces acceptable returns.

 

-We are in a macro environment where this type of business should produce better than average returns.

 

-We are still being punished for the sins of a company and macro situation that really doesnt exist anymore.

 

Thats all you need for massive outperformance, and it’s already showing up. 

+1

[Thrifty3000]

If FFH earns around $3.5 billion in 2024 as  expected, and if the market cap remains around BV, which is approx. $22 billion now, it seems buying back shares is an excellent way to allocate capital. Given FFH knows full well that buying back shares at 1x BV practically guarantees better than 10% EPS growth going forward, if we see FFH deploying cash in ways other than buybacks we should get pretty excited by the relative prospects.

 

2 favorable scenarios:

 

1) FFH gets to buy back shares at or below BV, which practically guarantees double digit EPS growth. 
 

2) Mr. Market bids FFH shares up above 1.2x BV and we all get to perceive the joyous wealth-effect of multiple expansion. Though we’ll have to face the anxiety of speculating whether FFH’s investment prospects will still be as good when they no longer have the no-brainer buyback option in their toolkit.

[Parsad]

4 hours ago, Gregmal said:

Isn’t the story a whole lot simpler? 
 

-This is a business that generally produces acceptable returns.

 

-We are in a macro environment where this type of business should produce better than average returns.

 

-We are still being punished for the sins of a company and macro situation that really doesnt exist anymore.

 

Thats all you need for massive outperformance, and it’s already showing up. 

 

+1!  Totally agree with this. 

 

I think some people may remain cautious because this was the setup in 2008/2009 and because of the short positions, those investment gains never totally materialized because they were offset by the short positions.  

 

Hopefully Prem and the old Hamblin Watsa team have learned from those mistakes, and the new blood (Wade and Lawrence) are a bit more active in finding investment targets when opportunity appears rather than playing a macro game.  Personally, I think they have...but others may still be a bit cautious...including some analysts.

 

Cheers!