Fairfax 2024

[hardcorevalue]

Not my favorite deal here, would love to be wrong but I wish they could have bought back their own stock instead or just kept increasing the balance sheet of the subsidiaries. The whole sales model of massive ad spend and we cut you a deal in store seems weak to me in 2024, although that is personal bias. Sleep Country feels like a share loser to Ikea, Costco and speciality stores over time. Hopefully we don’t go into a recession I guess. 

[Junior R]

First Storefront for Upscale Sleep Country Canada Concept ‘the rest’ Launches in Toronto [Photos/Interview]

 

https://retail-insider.com/retail-insider/2023/11/first-storefront-for-upscale-sleep-country-canada-concept-the-rest-launches-in-toronto-photos-interview/

[cwericb]

 

For those who question Fairfax dabbling in the Canadian furniture industry, FFH has some experience in this space. Several years back Fairfax picked up a major Canadian furniture chain called The Brick, a name familiar to nearly every Canadian.

 

 

Fairfax put Bill Gregson in to run the ship. Gregson shined the company up, turned it around and within 2 or 3 years Fairfax successfully flipped The Brick for a nice profit. I was following this closely at the time not only because I had shares in both companies but one of my kids was running The Brick's largest store at the time.

 

 

So it is not like Fairfax doesn't experience in the field. These guys know what they are doing.

 

[Hoodlum]

1 hour ago, Junior R said:

 

thanks, but that report is from May when the target was updated to $1950. 

[Junior R]

Just now, Hoodlum said:

thanks, but that report is from May when the target was updated to $1950. 

Look at the top it's from July with $2000 target

[Hoodlum]

2 minutes ago, Junior R said:

Look at the top it's from July with $2000 target

I see.  Although it looks like the report hasn’t changed 

[MMM20]

8 hours ago, Junior R said:

any reason why this is down today?

The answer is probably “volatility” but I also own HIFS which was up 6% today (and 30% over a few weeks) seemingly because the yield curve is finally coming close to de-inverting. I wonder if it’s as simple as the marginal buyer/seller thinking Fairfax loses as short term rates come down, combined with the fact that they’re in the quiet period so not buying back stock?

 

Edited July 26 by MMM20

[nwoodman]

@Thrifty3000 @Junior R thanks for the posts above.  Looking at this purchase through a health and wellness lens is a helpful take.   Having just been through this exercise we ended up spending 5k+ (The Rest territory) on a mattress and don’t regret it at all .  Something that you use for 6-8 hours over 7-10 years makes nickel and diming pointless IMHO.   We ended up going through a Sleep Country equivalent here in Oz, service and range were a factor in our choice of retailer.  The cheaper providers just felt shonky by comparison.  

 

I also wonder if Fairfax might be able to support the debt component at a more competitive rate too. Those credit rating upgrades are a beautiful thing. It becomes a bit of virtuous circle as they start adding relatively stable cashflow generators too.  

 

This purchase is growing on me, thanks for all the commentary. Hopefully we can look back and distinguish this from their other crappy retail investments.

[SafetyinNumbers]

I like the investment. Analysts aren’t modeling income from non-fixed income sources very well but they are growing and are becoming less cyclical. If that eventually translates to expected increases in annual earnings then it will allow more quants to buy the shares which will help with multiple expansion. 
 

Every investment deal where the expected returns are > 5% increases the odds of the company as a whole earning a 15% return given the leverage.

[dartmonkey]

1 hour ago, MMM20 said:

The answer is probably “volatility” but I also own HIFS which was up 6% today (and 30% over a few weeks) seemingly because the yield curve is finally coming close to de-inverting. I wonder if it’s as simple as the marginal buyer/seller thinking Fairfax loses as short term rates come down, combined with the fact that they’re in the quiet period so not buying back stock?

 

Or maybe fires taking out half of Jasper? Parks Canada self-insures but the rest of the town might be a substantial exposure for a Canadian P&C insurer or reinsurer. https://www.canadianunderwriter.ca/insurance/jasper-wildfires-industry-braces-for-huge-losses-1004248763/

[SafetyinNumbers]

Looks like the stock got hit yesterday because an analyst cut estimates bigly.

 

 

[TwoCitiesCapital]

16 hours ago, Thrifty3000 said:

VERY BIG clues about the investment opportunities at Sleep Country in ZZZ’s Q1 conference call transcript.

 

....

 

- they historically renovate 20 legacy stores annually

 

- over the last 7 ish years the renovated stores experienced average revenue increase from $1.8 mil CAD to $2.4 mil, which is 30% growth (HINT: what happens after renovating the 170 ish stores that haven’t been renovated yet?? What if they renovate immediately instead of waiting 7 more years?? Why would you wait 7 years to increase sales (market share) by 30%?!)

 

- they are testing several concepts that show even better prospects than the existing renovation!

 

...

 

 

 

 

 

Why wait? Perhaps either the capital constraints OR the desire to skip the 3.0 renovation and go straight to 4.0 on the remainder of the stores. 

 

Either way - it's something have a partner with deep pockets and a willingness to forego immediate dividends helps and having to publicly report results that would get thrashed by the upfront investment/depreciation accounting. We could very well see all of the stores renovated in the next 3-5 years instead of waiting at the current pace of ~20 per year and then Fairfax re-IPO....

[TwoCitiesCapital]

29 minutes ago, SafetyinNumbers said:

Looks like the stock got hit yesterday because an analyst cut estimates bigly.

 

People still listening to these guys when they've been way behind the ball on this name for the last 3 years?!?!?!

[SafetyinNumbers]

59 minutes ago, TwoCitiesCapital said:

 

People still listening to these guys when they've been way behind the ball on this name for the last 3 years?!?!?!

Quants gonna quant.

[Parsad]

4 hours ago, TwoCitiesCapital said:

 

People still listening to these guys when they've been way behind the ball on this name for the last 3 years?!?!?!

 

+1!  It's just the nature of the beast.  Cheers!

[Hoodlum]

Q2 results will be announced on the 1st. 
 

https://www.fairfax.ca/press-releases/fairfax-announces-conference-call-2024-07-26/

[Viking]

Who is Henry Singleton? And why should a Fairfax shareholder care?
 

“The failure of business schools to study men like (Henry) Singleton is a crime." Warren Buffett (quote from John Train’s book The Money Masters)

 

Fairfax’s business model has been inspired by many great businesspeople/investors over the years. Who are some that immediately come to mind? Here is my top 3 list:

1. Ben Graham - Value investing framework.
2. Warren Buffett - P/C insurance model (float); operating structure.
3. John Templeton - Go international; buy at the point of maximum pessimism.

Did I get the top 3 right? Let me know what you think. 

 

Who should be #4 on the list? 

 

I think it might be Henry Singleton. 

 

What did Fairfax learn from Henry Singleton? 

 

How to think about - and do - capital allocation. The big picture part of capital allocation. Use all the available tools (both ‘sources of cash’ and ‘uses of cash’) and use them at the right time. And go big when appropriate.

 

(Another more recent thing is optimizing the cash that is being earned by the operating businesses.)

 

Who is Henry Singleton? 

 

Henry Singleton is an individual who is not well followed. That is interesting given his amazing accomplishments over his lifetime.  

 

Below is a short biography from Wikipedia:

• “Henry Earl Singleton (November 27, 1916 – August 31, 1999) was an American electrical engineer, business executive, and rancher/land owner. Singleton made significant contributions to aircraft inertial guidance and was elected to the National Academy of Engineering. He co-founded Teledyne, Inc., one of America's most successful conglomerates, and was its chief executive officer for three decades. Late in life, Singleton became one of the largest holders of ranchland in the United States.”
• https://en.wikipedia.org/wiki/Henry_Earl_Singleton

What was Henry Singleton’s track record? 

 

Here is how William Thorndike, author of The Outsiders, sums up Henry Singleton’s track record:

• “Singleton left behind an extraordinary record, dwarfing both his peers and the market. From 1963 (the first year for which we have reliable stock data) to 1990, when he stepped down as chairman, Singleton delivered a remarkable 20.4 percent compound annual return to his shareholders (including spin-offs), compared to an 8.0 percent return for the S&P 500 over the same period and an 11.6 percent return for the other major conglomerate stocks. 
• “A dollar invested with Henry Singleton in 1963 would have been worth $180.94 by 1990, an almost ninefold outperformance versus his peers and a more than twelvefold outperformance versus the S&P 500…” William Thorndike - The Outsiders

Here is what Warren Buffett, a pretty hard marker, had to say about Henry Singleton:

• "Henry Singleton of Teledyne has the single best operating and capital deployment record in American business." Warren Buffett

Bottom line, when it comes to building long term per share value for shareholders, Henry Singleton is one of the all-time greats. 

 

What were Henry Singleton’s greatest strengths?

 

Singleton was exceptional at both core jobs of a CEO:

• Operating the business
• Capital allocation

Singleton’s overarching objective was to maximizing long term per share value for shareholders. 

 

Corporate structure

 

A key part of Singleton’s success was the corporate structure / operating model he set up at Teledyne:

• Operating businesses
  • Decentralized
  • Entrepreneurial
• Capital allocation
  • Centralized
  • Small head office

Does this structure look familiar? The inspiration for Berkshire Hathaway’s corporate structure likely came from Henry Singleton and Teledyne. Fairfax also employs this same structure. 

 

Operating businesses

 

Singleton was very good at operating businesses - putting in place the right structure, incentives and people. 

 

And the focus of the operating businesses was on cash generation, especially when the company completed the acquisition phase of its growth in the late 1960’s. This last point is critically important because optimizing cash feeds the ‘sources of cash’ part of capital allocation. 

 

Capital allocation

 

In the rest of this post we are going to focus on the greatest strength of Singleton - capital allocation - because it is not well understood. And because it  perhaps offers great insight into how Fairfax operates today.

 

Singleton’s Capital allocation framework

 

Singleton was a trailblazer when it came to capital allocation. What made Singleton stand out from peers at the time?

• Open minded/range - he was open to using all tools in the capital allocation toolbox (for both ‘sources of cash ‘ and ‘uses of cash’).
• Flexible - he was open minded / he adapted to changing circumstances.
• Rational/analytical - he used the right tool for the right job at the right time.
• Opportunistic/conviction - big opportunities were exploited very aggressively (he had a temperament that allowed him to do this).
• Independent thinker/contrarian - he often did the opposite of what conventional wisdom suggested was the right thing to do at the time.
• Unconventional - it did not matter to him that Wall Street did not/frowned on some of his methods / the use of certain tools.

Control: it is important to note that Singleton was firmly in control of Teledyne. This control gave him the freedom to execute his unconventional approach to running Teledyne.

 

Shareholders’ Equity - the genius of Henry Singleton

 

We are going to focus on what Henry Singleton is known for most - his aggressive/prolific management of the company’s stock - both in issuing stock and buying it back.

 

Singleton followed a pretty simple playbook:

• When stock is overvalued - aggressively issue stock and use it as currency to grow the business (buying other companies when they are available at much lower valuations).
• When stock is undervalued - use much higher cash flow from the business to aggressively buy back shares.

Singleton had two distinct phases:

 

1.) Aggressively issue Teledyne stock (1960 to 1968) - executed at an average PE of 25x

• Allowed Teledyne to get much more back (value of companies being purchased) than what he was giving up (value of Teledyne’s stock).
• Singleton bought 128 companies using Teledyne’s stock; he massively expanded the size and scale of the company. 

2.) Aggressively buy back Teledyne stock (1971 to 1984) - executed at an average PE of 8x

• Allowed Teledyne to get much more back (value of Teledyne’s stock) than what he was giving up (using cash in some other way).
• He bought back stock using tender offers (not open market purchases).
• Reduced shares outstanding at Teledyne by 90% by the time he was done.

Unlike today, in the 1970’s buying back stock was viewed very negatively by Wall Street - it was viewed as a sign of weak/poor business prospects/management. 

 

What really stands out with Singleton is:

• The scale in which he operated when executing a winning strategy - both the massive number of shares he issued and the massive number of shares he then repurchased. Each phase lasted/was executed over a full decade. 
• The discipline he demonstrated: shares were only issued at a premium valuation and repurchased at a low valuation.

Singleton had an unfair advantage

 

‘Good artists borrow. Great artists steal.’ Picasso/Steve Jobs

 

What company did Singleton understand better than any other? Teledyne - his own company. He also understood the company much better than Mr. Market and Wall Street.

 

Singleton took Benjamin Graham’s insight on Mr. Market and the stock market in general and applied a unique twist - he applied it to Teledyne’s stock.

 

The end result was amazing per share value creation for long term shareholders. 

 

Was Singleton taking advantage of Teledyne’s shareholders?

 

Warren Buffett often talks about buybacks along moral lines - at least when it comes to Berkshire Hathaway and how the company thinks about its own shareholders. My view is this is more good marketing from Buffett than anything else. 

 

Buffett loves it when companies he owns buy back a bunch of their own stock - Apple is a great current example. And we know he thinks very highly of Henry Singleton. In recent years, Buffett has relented and has started buying back Berkshire Hathaway stock in meaningful quantities. 

 

The truth is long term shareholders of Teledyne made out exceptionally well - they made a fortune holding Teledyne stock over the decades. 

 

Bottom line, shareholders’ equity is an exceptionally important tool in the capital allocation toolbox that management teams can use to grow per share value for shareholders.

 

If it is such a good idea why is it not used more?

 

The interesting thing is most management teams are terrible in their execution of this strategy: they tend to issue their own stock at low valuations and buy back their stock at high valuations. These activities destroy long term per share value for shareholders.

 

Most companies don’t utilize this strategy more aggressively because they are terrible at it. 

 

What does all this have to with Fairfax?

 

Not all companies are terrible at executing this strategy. That is what we will explore in our next post. 

—————-

Twenty Punch Investments

• https://www.twentypunchinvestments.com/p/henry-singleton-and-teledyne

—————-

A Case Study in Financial Brilliance - Teledyne by Leon Coopermam

• https://fundamentalfinanceplaybook.com/wp-content/uploads/2019/02/leon-cooperman-case-study-henry-singleton-teledyne.pdf

—————-

Henry Singleton: A Capital Allocation Masterclass in Three Acts by Kingswell

• https://www.kingswell.io/p/henry-singleton-a-capital-allocation

—————-

The Outsiders | William Thorndike | Talks at Google

 

 

Edited July 29 by Viking

[ValueMaven]

Great post @Viking - thank you.  Personally, I think Prem & Team will be buying back a lot of stock similar to Teledyne 2.0 ... Leon Cooperman once wrote an article on Teledyne and I believe was on the board of directors.  There was once a negative piece written on Teledyne in Barrons and Cooperman wrote a wonder reply to the editors which was published.  Let me see if I can find it.

[Hektor]

5 hours ago, Viking said:

The inspiration for Berkshire Hathaway’s corporate structure likely came from Henry Singleton and Teledyne. Fairfax also employs this same structure. 

I think I read somewhere that Singleton, in his later years, approached Buffett and Munger to sell his firm. The transaction did not proceed due to Singleton needing Berkshire shares and Buffet/Munger preferring to pay in cash.

Edited July 29 by Hektor

[Hektor]

5 hours ago, Viking said:

Warren Buffett often talks about buybacks along moral lines - at least when it comes to Berkshire Hathaway and how the company thinks about its own shareholders. My view is this is more good marketing from Buffett than anything else. 

 

Buffett loves it when companies he owns buy back a bunch of their own stock - Apple is a great current example. And we know he thinks very highly of Henry Singleton. In recent years, Buffett has relented and has started buying back Berkshire Hathaway stock in meaningful quantities. 

I think Buffett has long advertised his parameters for buying back his own share, and telling (or may be tuning) his share holders to think of such an action to mean that Berkshire is cheap in his view - which is different from other CEOs who may not advertise that their own shares are cheap. 

 

Also, I think Buffett (and Munger, may be) prefers other companies where Berkshire is a share holder (e.g. Apple) buy back their own shares, even when the shares are fairly valued, to avoid the alternative use of that capital (i.e. diworsify). 

 

Note: I have no views on Buffet's buy back approach being marketing or not

 

@Viking, Thanks much for generously sharing your thinking and writing. 

[petec]

On 7/25/2024 at 10:14 PM, TwoCitiesCapital said:

Other than Eurobank with its oligopoly that was bought on its way to bankruptcy - what Fairfax investments have "moats"?

 

I'm not sure Eurobank has a moat - at least not one that protects its economics. Banking is highly commoditised, and net interest margins are dependant on Eurozone interest rates not going back to 0.

[73 Reds]

One common criticism of Buffett is his "management" of the share price.   Were he to allow the stock to be more volatile, he would have more opportunities to both repurchase shares when the price is cheap and use the stock as currency when the price gets expensive.  I would expect future management to avoid addressing the share price.

[Gamma78]

9 hours ago, petec said:

 

I'm not sure Eurobank has a moat - at least not one that protects its economics. Banking is highly commoditised, and net interest margins are dependant on Eurozone interest rates not going back to 0.

 

Distribution would be a moat (so retail footprint) and scale of deposits. Retail deposits are the lowest cost financing a bank can have (though they carry their own risk). Replicating Eurobank's retail footprint and deposit scale for a newer entrant is tougher. Brand I guess would be a third, but I think that is actually very tied to retail footprint. I think that is about the biggest moat a bank can have

[Viking]

48 minutes ago, Gautam Sahgal said:

 

Distribution would be a moat (so retail footprint) and scale of deposits. Retail deposits are the lowest cost financing a bank can have (though they carry their own risk). Replicating Eurobank's retail footprint and deposit scale for a newer entrant is tougher. Brand I guess would be a third, but I think that is actually very tied to retail footprint. I think that is about the biggest moat a bank can have

 

Management is a moat (look at Jamie Dimon) - look at what the management team at Eurobank has done over the past 5 years. Yes, Greece electing a pro-business government has helped. And the end of zero interest rates. 

 

But I think focussing too much on 'moat' can box an investor in (that hammer thing Munger liked to talk about so much). All of Fairfax's equity investments are investments. At the end of the day, what I really care about is what kind of a return the equity investments will generate for Fairfax over the next 3 to 5 years.   

 

What was Stelco's moat? That is debatable (perhaps it was one thing - Kestenbaum). And what a great investment for Fairfax. Overly focussing on moat when looking at Stelco would have probably messed an investor up. Fairfax has lots of investments like Stelco. Trying to evaluate them primarily through the lens of a moat misses the key point - Fairfax's business model is very different than Berkshire Hathaway's (or how Fairfax execute's within the model). Both companies are very good.

 

It's like having two kids as a parent. One kid does something a certain way and is really good at it. And a parent keeps wishing the other kid, who is successful in their own right, would be more like the first kid (at that certain thing). For a parent, this approach is usually not a recipe for success. If both kids are successful - be happy. And appreciate/embrace their differences.

Edited July 29 by Viking

[Hoodlum]

Sleep Country is currently trading at or slightly over the $35/share offer.   I doubt Fairfax would need to increase their offer.

 

https://www.bnnbloomberg.ca/business/2024/07/29/sleep-country-holders-mull-fairfaxs-offer-as-stock-rises-above-it/

 

Samir Taghiyev, portfolio manager for Canadian small-cap equities at Mawer Investment Management, said the timing is “not the most ideal,” though he sees the price as being close to fair. Mawer is one of the largest Sleep Country shareholders, according to data compiled by Bloomberg, holding about 5% of the shares as of the end of June.

 

“This is a time where the valuations are depressed due to the high interest rates, but also the demand for mattresses and revenues for Sleep Country are depressed and the margins are depressed,” he said. “So over the long term, when those trends revert or normalize, Fairfax should be getting a very good deal.”

 

Stifel analyst Martin Landry said in a note to clients that Fairfax’s offer seems “slightly opportunistic,” with Sleep Country’s earnings not yet running at a normal level. He expects the deal will be approved by shareholders, even though a higher valuation may be warranted.

 

If that happens, Fairfax will reap the benefit. Still, Sleep Country management highlighted the ability for shareholders to lock in returns by accepting the cash offer now. “We are pleased to have reached an agreement that provides certainty of significant and immediate value to shareholders,” Christine Magee, chair and co-founder of Sleep Country, said in the release announcing the deal.