Fairfax 2024

[SafetyinNumbers]

44 minutes ago, glider3834 said:

https://www.thestar.com/business/sleep-country-earnings-rise-as-direct-to-consumer-brands-help-buffer-softer-spending/article_6c9e8dbc-f16d-587a-b4b0-99dc40230440.html

Looks like a good sized beat on revenue, EBITDA and EPS for  

[nwoodman]

1 hour ago, glider3834 said:

https://www.thestar.com/business/sleep-country-earnings-rise-as-direct-to-consumer-brands-help-buffer-softer-spending/article_6c9e8dbc-f16d-587a-b4b0-99dc40230440.html

Cheers.  
 

This stood out from the release

 

“Despite the strong overall performance in Q2, we have been seeing a trend with our customers trading down to lower priced mattresses at SCC/DV with double digit declines in units in our highest price band.  This trend has continued into Q3 2024, with the SCC/DV network experiencing negative (8.4%) SSS¹ for the month of July, our biggest monthly decline seen this year, while our DTC SSS¹ metric grew 30.0% in July 2024 tied to promotional discounting and accessory bundling," continued Schaefer. “
 

Metrics - quick and dirty.  For me 1x’s sales 2x’s book would be the starting point based on 6% NM.  Their margins are pretty tidy for this type of business.

 

The net margins are:

• Q2 2024: 6.81%
• YTD 2024: 5.56%

Based on Fairfax's takeover price of $35 per share:

1. Transaction Value:
   • Offer price: $35 per share
   • Total shares outstanding: 33,901,254
   • Equity value: $1.19 billion (33,901,254 * $35)
   • Enterprise value: Approximately $1.7 billion (as stated in the announcement)
2. Price-to-Earnings (P/E) Ratio:
   • Based on Q2 2024 diluted EPS of $0.46, annualized to $1.84
   • P/E Ratio = 35 / 1.84 = 19.0x
3. EV/EBITDA:
   • Using Q2 Operating EBITDA of $50.9 million, annualized to $203.6 million
   • EV/EBITDA = 1,700 / 203.6 = 8.35x
4. Price-to-Sales (P/S) Ratio:
   • Based on Q2 2024 revenue of $232.5 million, annualized to $930 million
   • P/S Ratio = 1,190 / 930 = 1.28x
5. Price-to-Book Value:
   • Total Shareholders' Equity (as of June 30, 2024): $463.8 million
   • Price-to-Book Ratio = 35 / (463.8 / 33,901,254) = 2.56x
6. EBITDA Margin:
   • Q2 2024 Operating EBITDA margin: 21.9%
7. Revenue Growth:
   • Q2 2024 vs Q2 2023: 7.0% increase
8. Same Store Sales (SSS) Growth:
   • Q2 2024: 4.8% increase
9. Dividend Yield (based on last declared dividend):
   • Annual dividend: $0.948 ($0.237 * 4 quarters)
   • Dividend Yield = 0.948 / 35 = 2.71%

Edited August 9, 2024 by nwoodman

[UK]

9 hours ago, MMM20 said:

Great post. Yeah this little drawdown has me missing the good ol’ days a few years ago where everyone just knew Fairfax was shit so didn’t bat an eye when the stock went down, b/c of course it would - Prem was a bum and rates would be at 0 forever and they’d keep losing hundreds of millions shorting. Some might need to lighten up their position a bit and/or touch grass!
 

 

Perhaps I am getting a little bit to excited / to early excited (maybe because also of this general market volatility), but I sold some extra shares I bought during MW attack, earlier, mainly only because of the position size (which still remains and will continue to be very large in any case) and now already thinking about buying them back. But perhaps I also should wait for some weather event to do this. Most likelly this is just a silly, immaterial and unnecessary trading, because of some more free time in a summer:)

 

Edited August 9, 2024 by UK

[value_hunter]

15 hours ago, nwoodman said:

Cheers.  
 

This stood out from the release

 

“Despite the strong overall performance in Q2, we have been seeing a trend with our customers trading down to lower priced mattresses at SCC/DV with double digit declines in units in our highest price band.  This trend has continued into Q3 2024, with the SCC/DV network experiencing negative (8.4%) SSS¹ for the month of July, our biggest monthly decline seen this year, while our DTC SSS¹ metric grew 30.0% in July 2024 tied to promotional discounting and accessory bundling," continued Schaefer. “
 

Metrics - quick and dirty.  For me 1x’s sales 2x’s book would be the starting point based on 6% NM.  Their margins are pretty tidy for this type of business.

 

The net margins are:

• Q2 2024: 6.81%
• YTD 2024: 5.56%

Based on Fairfax's takeover price of $35 per share:

1. Transaction Value:
   • Offer price: $35 per share
   • Total shares outstanding: 33,901,254
   • Equity value: $1.19 billion (33,901,254 * $35)
   • Enterprise value: Approximately $1.7 billion (as stated in the announcement)
2. Price-to-Earnings (P/E) Ratio:
   • Based on Q2 2024 diluted EPS of $0.46, annualized to $1.84
   • P/E Ratio = 35 / 1.84 = 19.0x
3. EV/EBITDA:
   • Using Q2 Operating EBITDA of $50.9 million, annualized to $203.6 million
   • EV/EBITDA = 1,700 / 203.6 = 8.35x
4. Price-to-Sales (P/S) Ratio:
   • Based on Q2 2024 revenue of $232.5 million, annualized to $930 million
   • P/S Ratio = 1,190 / 930 = 1.28x
5. Price-to-Book Value:
   • Total Shareholders' Equity (as of June 30, 2024): $463.8 million
   • Price-to-Book Ratio = 35 / (463.8 / 33,901,254) = 2.56x
6. EBITDA Margin:
   • Q2 2024 Operating EBITDA margin: 21.9%
7. Revenue Growth:
   • Q2 2024 vs Q2 2023: 7.0% increase
8. Same Store Sales (SSS) Growth:
   • Q2 2024: 4.8% increase
9. Dividend Yield (based on last declared dividend):
   • Annual dividend: $0.948 ($0.237 * 4 quarters)
   • Dividend Yield = 0.948 / 35 = 2.71%

Can someone explain to me why it's better to buy a business (PE:19, PB: 2.5) than buy its own share (PE 7, PB 1.1)? 

[gfp]

5 minutes ago, value_hunter said:

Can someone explain to me why it's better to buy a business (PE:19, PB: 2.5) than buy its own share (PE 7, PB 1.1)? 

 

Well it is not better, but it could be smart to do both.  And don't fret over the price to book value of the mattress retailer - I don't think the book value matters at all and it will be written up to 1x book value once the acquisition goodwill is assigned anyway.  Book value is just an accounting construct.

 

Repurchasing shares at a discount is great capital allocation and also shrinks your capital base and earning power.  Buying profitable businesses that don't correlate with insurance in order to build out the type of diversified non-insurance income that has benefited Berkshire over time increases your earning power, increases your diversity of earnings, and builds long term strength of the enterprise.  Returning capital to shareholders might be great and accretive on a per-share basis for your owners, but it doesn't do a lot to increase the long term strength of the enterprise.  It's a return of capital after all.

[73 Reds]

18 minutes ago, value_hunter said:

Can someone explain to me why it's better to buy a business (PE:19, PB: 2.5) than buy its own share (PE 7, PB 1.1)? 

Well, the business may prefer growth over shrinkage and there ain't too may PE 7, PB 1.1 other businesses available (?)

[Munger_Disciple]

11 minutes ago, gfp said:

 

Well it is not better, but it could be smart to do both.  And don't fret over the price to book value of the mattress retailer - I don't think the book value matters at all and it will be written up to 1x book value once the acquisition goodwill is assigned anyway.  Book value is just an accounting construct.

 

Repurchasing shares at a discount is great capital allocation and also shrinks your capital base and earning power.  Buying profitable businesses that don't correlate with insurance in order to build out the type of diversified non-insurance income that has benefited Berkshire over time increases your earning power, increases your diversity of earnings, and builds long term strength of the enterprise.  Returning capital to shareholders might be great and accretive on a per-share basis for your owners, but it doesn't do a lot to increase the long term strength of the enterprise.  It's a return of capital after all.

 

+1

I would just add that repurchasing shares also increases a shareholder's proportionate ownership of Fairfax's existing businesses. So management has to be sure that buying a mattress business is a better use of capital than repurchase of shares. A buyback is functionally equivalent to a (mostly) tax-free dividend that is automatically reinvested in the company by purchase of shares by the owner in the public markets. 

Edited August 9, 2024 by Munger_Disciple

[LC]

Yeah I don't like the acquisition much - even if everything goes right and they are able to improve the mattress biz. 

 

19x earnings for Mattresses vs. 8x for Fairfax.

[StubbleJumper]

41 minutes ago, value_hunter said:

Can someone explain to me why it's better to buy a business (PE:19, PB: 2.5) than buy its own share (PE 7, PB 1.1)? 

 

On buybacks

 

Well there's a couple of factors that matter for the repurchases.  The first is the price that you are able to repurchase at (ie, 1x, 1.1x, 1.3x, etc) and the second is the volume that you are reasonably able to obtain.

 

On the question of price, a buyback is only a good thing for continuing shareholders if it is priced lower than intrinsic value.  So, you kinda need to think about what your evaluation of IV is for FFH.  If you are in the camp that believes that FFH is truly worth 1.5x, then every share bought back at 1.1x is probably one of the best investments that FFH can make (it would be roughly a 73-cent dollar).  But, if you are in the more conservative camp and you aren't sure that the market will ever give you more than 1.2x BV, then a buyback at 1.1x probably isn't the best investment as it would be a 92-cent dollar.  At a 92-cent dollar, you'd probably hold the view that FFH would be better to use the excess capital to buy out the minority positions held by OMERS, which tend to give OMERS that 8-9% guaranteed annualized return...  

 

The second factor is volume, which eventually becomes a problem.  Through the NCIB, FFH can only buy back 25% of the daily volume.  To conduct a large buyback, you'd probably need a SIB, which usually requires that you offer a premium over the prevailing market price.  With a prevailing market price of 1.1x, you'd probably need an SIB price of at least 1.2x to attract shares.  And, then at 1.2x, you have to reflect on just how high IV is and whether the SIB is providing an adequate return to continuing shareholders.

 

I was pleasantly surprised that FFH's prevailing market price dropped to about 1.0x earlier this week.  At that price, most shareholders will hold the view that a buyback is being conducted at a considerable discount to IV.  But, at 1.2x, I'm not sure that you'd have a consensus on that view.

 

 

On other investments

 

The other thing to keep in mind is that usually purchases like Sleep Country are shared out among the insurance subs (so NB buys XX%, C&F buys YY%, and Odyssey buys ZZ%).  The insurance subs need to maintain a certain level of reserves and you need to invest those reserves in something other than FFH's own shares (but there's room for debate about whether Sleep Country is the best investment available).  

 

 

SJ

Edited August 9, 2024 by StubbleJumper

[hardcorevalue]

Let’s just all agree that if this company was called "Sleep Country USA” Fairfax would never have touched it...

 

It’s not the best use of shareholder capital in my opinion but doesn’t change the FFH thesis over the long term. 

[Munger_Disciple]

5 minutes ago, LC said:

Yeah I don't like the acquisition much - even if everything goes right and they are able to improve the mattress biz. 

 

19x earnings for Mattresses vs. 8x for Fairfax.

 

 

I would prefer a large tender offer instead at these multiples.

[value_hunter]

3 minutes ago, StubbleJumper said:

 

On buybacks

 

Well there's a couple of factors that matter for the repurchases.  The first is the price that you are able to repurchase at (ie, 1x, 1.1x, 1.3x, etc) and the second is the volume that you are reasonably able to obtain.

 

On the question of price, a buyback is only a good thing for continuing shareholders if it is priced lower than intrinsic value.  So, you kinda need to think about what your evaluation if IV is for FFH.  If you are in the camp that believes that FFH is truly worth 1.5x, then every share bought back at 1.1x is probably one of the best investments that FFH can make (it would be roughly a 73-cent dollar).  But, if you are in the more conservative camp and you aren't sure that the market will ever give you more than 1.2x BV, then a buyback at 1.1x probably isn't the best investment as it would be a 92-cent dollar.  At a 92-cent dollar, you'd probably hold the view that FFH would be better to use the excess capital to buy out the minority positions held by OMERS, which tend to give OMERS that 8-9% guaranteed annualized return...  

 

The second factor is volume, which eventually becomes a problem.  Through the NCIB, FFH can only buy back 25% of the daily volume.  To conduct a large buyback, you'd probably need a SIB, which usually requires that you offer a premium over the prevailing market price.  With a prevailing market price of 1.1x, you'd probably need an SIB price of at least 1.2x to attract shares.  And, then at 1.2x, you have to reflect on just how high IV is and whether the SIB is providing an adequate return to continuing shareholders.

 

I was pleasantly surprised that FFH's prevailing market price dropped to about 1.0x earlier this week.  At that price, most shareholders will hold the view that a buyback is being conducted at a considerable discount to IV.  But, at 1.2x, I'm not sure that you'd have a consensus on that view.

 

 

On other investments

 

The other thing to keep in mind is that usually purchases like Sleep Country are shared out among the insurance subs (so NB buys XX%, C&F buys YY%, and Odyssey buys ZZ%).  The insurance subs need to maintain a certain level of reserves and you need to invest those reserves in something other than FFH's own shares (but there's room for debate about whether Sleep Country is the best investment available).  

 

 

SJ

Given Fairfax's borrow cost is around 6%, any business's profit higher than that will be accretive. So even buy back share at PB 1.4, the annual return is still higher than 10% (assume PE 10). But Sleep country's return (PE 19) is just around 5%. I can't see that purchase will be accretive to Fairfax.

[SafetyinNumbers]

13 minutes ago, value_hunter said:

Given Fairfax's borrow cost is around 6%, any business's profit higher than that will be accretive. So even buy back share at PB 1.4, the annual return is still higher than 10% (assume PE 10). But Sleep country's return (PE 19) is just around 5%. I can't see that purchase will be accretive to Fairfax.

It doesn’t make sense to do that comparison without consideration for the leverage the float provides. Fairfax has almost 3x the assets as equity. A 5% return is effectively a 15% ROE on that basis. Also, while the P/E on trailing basis might look like does not demonstrate the full economics of the transaction as FCF is significantly higher and a big chunk of that is being reinvested in the business to maintain the moat.

 

[StubbleJumper]

16 minutes ago, value_hunter said:

Given Fairfax's borrow cost is around 6%, any business's profit higher than that will be accretive. So even buy back share at PB 1.4, the annual return is still higher than 10% (assume PE 10). But Sleep country's return (PE 19) is just around 5%. I can't see that purchase will be accretive to Fairfax.

 

 

You keep using PE to describe FFH's valuation, but that's not the best measure for an insurance company with cyclical earnings (particularly if you might be near the top of the cycle!).  A buyback at 1.4x BV would be at a valuation that is at the high end of what the market has historically offered FFH shareholders.  In short, there's a considerable likelihood that you'd be buying back shares either at or ABOVE intrinsic value, which is probably not a good thing for continuing shareholders.  

 

If you are suggesting that FFH should lever-up by borrowing money to buy back shares, that's yet another conversation about what the appropriate gearing should be for FFH and what that means for financial risk.

 

 

SJ

[dartmonkey]

17 minutes ago, StubbleJumper said:

On the question of price, a buyback is only a good thing for continuing shareholders if it is priced lower than intrinsic value.  So, you kinda need to think about what your evaluation of IV is for FFH.  If you are in the camp that believes that FFH is truly worth 1.5x, then every share bought back at 1.1x is probably one of the best investments that FFH can make (it would be roughly a 73-cent dollar).  But, if you are in the more conservative camp and you aren't sure that the market will ever give you more than 1.2x BV, then a buyback at 1.1x probably isn't the best investment as it would be a 92-cent dollar.  At a 92-cent dollar, you'd probably hold the view that FFH would be better to use the excess capital to buy out the minority positions held by OMERS, which tend to give OMERS that 8-9% guaranteed annualized return...  

...

I was pleasantly surprised that FFH's prevailing market price dropped to about 1.0x earlier this week.  At that price, most shareholders will hold the view that a buyback is being conducted at a considerable discount to IV.  But, at 1.2x, I'm not sure that you'd have a consensus on that view.

 

I don't think intrinsic value and "what the market will ever give you" are the same thing.

 

Say you are pessimistic and think the market will never give you more than 1.2x BV, and you can buy the shares at 1.0x BV. But that company is earning 15% of BV every year. In 5 years, that BV will be 2.01x higher. 15% is still a pretty good return, and if the market is now giving you 1.2BV, it means shares will be up by 2.4x, giving you an annualized return of 19%, which is good enough for me. 

 

If I buy Sleep Country at a P/E of 19, growing at 10% a year, then I can expect a 5.3% return plus 10%, or 15%, if multiples stay about the same.

 

SJ makes a good argument that regulators will require that insurance companies' liabilities be covered by assets, so there is a very good argument for Fairfax to acquire a big steady earner instead of just investing in its own shares at 1.0x BV. But I think repurchases would provide the higher investment return, even if Mr Market keeps its pessimistic multiple, just because Fairfax is making such a high return on its equity.

 

[StubbleJumper]

1 minute ago, dartmonkey said:

I don't think intrinsic value and "what the market will ever give you" are the same thing.

 

 

Definitely not the same thing.  But, as a value investor, you attempt to buy something for less than IV and then you hope that the market will eventually realize that you were right and will give you IV (or even better, perhaps you'll get lucky and it'll overshoot!).  If the market doesn't eventually award you IV, then you just have to accept the mental thrill of being right when everyone else was wrong, even if you can't necessarily monetize your correctness!

 

3 minutes ago, dartmonkey said:

Say you are pessimistic and think the market will never give you more than 1.2x BV, and you can buy the shares at 1.0x BV. But that company is earning 15% of BV every year. In 5 years, that BV will be 2.01x higher. 15% is still a pretty good return, and if the market is now giving you 1.2BV, it means shares will be up by 2.4x, giving you an annualized return of 19%, which is good enough for me. 

 

Yes, you eventually do get some the benefit of being right, but it can take a great many years, especially if the difference between the prevailing market valuation and IV is small.  

 

The key is to be very disciplined about your purchase price, and that holds true whether you are an individual investor or whether you are FFH conducting buybacks!

 

 

SJ

[value_hunter]

7 minutes ago, StubbleJumper said:

 

 

If you are suggesting that FFH should lever-up by borrowing money to buy back shares, that's yet another conversation about what the appropriate gearing should be for FFH and what that means for financial risk.

 

 

SJ

Isn't the TRS a kind of borrowing to buy back share?

[StubbleJumper]

Just now, value_hunter said:

Isn't the TRS a kind of borrowing to buy back share?

 

Absolutely.  And it imposes an incremental cash flow risk on FFH's holdco. 

 

When the shares go up in price, FFH receives a nice cheque from the TRS counter-party.  But, if the shares go down in price, FFH must write a large cheque to the counter-party.  So, taking today's price as a baseline, if the shares dropped 25% (this is the sort of thing that can sometimes happen during a market-displacement), FFH would be on the hook for about US$270 per share for those TRS.  When you look at Note 5 to the financial statements, that would be a considerable chunk of the holdco's cash balances.

 

So far the TRS have worked out wonderfully well.  But, there's a risk in the philosophy that if some is good, more is better!  A hypothetical 25% decline in the share price is manageable with the current TRS position size and with existing holdco cash balances, but if FFH were to double that position, it could become quite a challenge.

 

 

SJ

[value_hunter]

4 minutes ago, StubbleJumper said:

 

Absolutely.  And it imposes an incremental cash flow risk on FFH's holdco. 

 

When the shares go up in price, FFH receives a nice cheque from the TRS counter-party.  But, if the shares go down in price, FFH must write a large cheque to the counter-party.  So, taking today's price as a baseline, if the shares dropped 25% (this is the sort of thing that can sometimes happen during a market-displacement), FFH would be on the hook for about US$270 per share for those TRS.  When you look at Note 5 to the financial statements, that would be a considerable chunk of the holdco's cash balances.

 

So far the TRS have worked out wonderfully well.  But, there's a risk in the philosophy that if some is good, more is better!  A hypothetical 25% decline in the share price is manageable with the current TRS position size and with existing holdco cash balances, but if FFH were to double that position, it could become quite a challenge.

 

 

SJ

If Fairfax has the money, why pay interest(I assume that probably higher than 6%) for TRS and not buy back share directly?

[StubbleJumper]

 

13 minutes ago, value_hunter said:

If Fairfax has the money, why pay interest(I assume that probably higher than 6%) for TRS and not buy back share directly?

 

Until recently, the holdco didn't have the money to close out the TRS and buy back the shares.  Over the past three years, the insurance subs were growing their books of business so rapidly that they needed to retain most of their earnings to support their statutory capital requirements.  It appears like the hard market might be abating, so the subs might now be better positioned to dividend money up to the holdco. 

 

Whether closing out the TRS is a priority for holdco cash is yet another question.  There are many things that can be done with excess capital, and that might be a secondary or tertiary option.

 

 

SJ

[Viking]

When I evaluate Fairfax's investment decisions, my watch out is an 'equity hedge/short' type decision. Something really big.

 

From 2010 to 2020, Fairfax's equity hedge/short positions cost the company a total of $5.4 billion in losses = an average of $494 million per year. 

 

The equity hedge position was removed in late 2016. This position was the big issue. From 2010 to 2016, the equity hedge/short positions cost Fairfax a total of $4.4 billion in losses = $628 million per year. 

 

The last short position was removed in late 2020. From 2017-2020, the short positions cost Fairfax a total of $1.04 billion = $261 million per year. 

 

Exiting the equity hedge position in 2016 was a massive win for shareholders. Exiting the last short position in late 2020 was a big win for shareholders. 

 

The bottom line, at the start of 2021, the chains of the equity hedge/short positions had been completely removed from the company. It was like a $494 million annual expense that the company paid from 2010 to 2020 had been removed and Fairfax became $494 million 'more profitable' every year moving forward. 

 

The crazy thing is this 'investment' only stunted Fairfax's growth from 2010 to 2020. It really was amazing what Fairfax was able to still accomplish from 2010 to 2020 - especially the significant build out of their P/C insurance business. (The many shitty equity holdings on the books at the time was another headwind - making Fairfax's performance even more impressive.)

 

What this shows is the incredible earnings power that exists within Fairfax - that P/C insurance (float) + active management of the investment portfolio (equities etc).

 

Of course, 2010 to 2020 was a lost decade for Fairfax shareholders. So I am not trying to sugar coat what happened when it comes to the share price. 

 

No equity hedge/short positions. The equity portfolio has been cleaned up. The future looks bright - I can't wait to see what the Fairfax team can deliver in the coming years.

 

What does it mean for today?

 

Sleep Country has been a hot topic among board members - I sense lots of angst.

 

To be honest, I don't understand all the angst.

 

1.) The management team at Fairfax has been executing exceptionally well since 2018. This is a long enough time for me - they have re-earned a certain amount of trust.

 

2.) We have no visibility into why they bought Sleep Country. There likely were many factors involved (P/C insurance capital levels, taxes, strategic fit within investment portfolio, strategic fit within total company, valuation, future prospects etc) - and we are largely in the dark. And no, I do not expect the management team at Fairfax to have to 'justify' every decision they make to investors.

 

3.) Sleep Country is a small purchase. It represents about 2% of Fairfax's investment portfolio and 6% of its equity portfolio.

 

4.) Sleep Country looks to be well managed. It is a strong franchise (in Canada - and I know this is hard for those outside of Canada to understand). It is profitable. The issue is some don't think it will earn enough (to justify the purchase price). 

 

Today, do I love the Sleep Country purchase? No. But do I dislike it? No. 

 

The bottom line, it is a non-issue for me - if Fairfax thinks this is a good decision, given their track record since 2018, I am ok with it. Done.

 

Obesssing about small potatoes (Sleep Country) runs the risk of me losing sight of the bigger picture of why I am invested in Fairfax  - I try and be careful about what (and how much) I let into my head.

 

My watch out for Fairfax and their investments is an equity/hedge short type of decision that I don't like. Something that costs them +$500 million per year - for years. That WILL get my attention.

 

The power of Fairfax's business model today is VERY IMPRESSIVE. Given the level of earnings, they are going to be making lots of billion dollar decisions in the coming years. They are going on the offensive. I can't wait. And I am going to try and be open minded when we learn what they are doing...

 

 

Edited August 9, 2024 by Viking

[value_hunter]

Can I explain Sleepcountry's purchase like this? Fairfax treat buying and taking private equivalent as buying corporate bond. unlike buying public stock shares, this is equivalent to lock a 5.3%+ return permanently without worrying stock price fluctuations. Given Fairfax's bond portfolio return is around 5% and only lock in several years, this makes sense. The question is whether rate agency treat owning sub-business the same risk as buying corporate bond?

Edited August 9, 2024 by value_hunter

[MMM20]

1 hour ago, StubbleJumper said:

Definitely not the same thing.  But, as a value investor, you attempt to buy something for less than IV and then you hope that the market will eventually realize that you were right and will give you IV (or even better, perhaps you'll get lucky and it'll overshoot!).  If the market doesn't eventually award you IV, then you just have to accept the mental thrill of being right when everyone else was wrong, even if you can't necessarily monetize your correctness!

I don’t follow your logic at all. How do you value a business if not on discounted future cash flows? The future cash flows are what matters, not the accountant’s view of history. Like how do you own Fairfax without focusing on the earnings power of the business? And have you considered the possibility that Fairfax shares have just traded at a big discount to intrinsic value for most of the past 30 years? You don’t even need the stock to rerate - you just need the company to agree and keep buying back the shares below intrinsic value. Even if it never rerates you end up with a great outcome and that’s exactly what’s happened here! Im still convinced a major reason FFH still trades how it does despite the obvious step change in normalized earnings power over the past few years is that even the smart money is focused on an essentially irrelevant accounting construct more so than in any other business I’ve ever come across. 
 

Edited August 9, 2024 by MMM20

[TwoCitiesCapital]

54 minutes ago, StubbleJumper said:

 

 

Until recently, the holdco didn't have the money to close out the TRS and buy back the shares.  Over the past three years, the insurance subs were growing their books of business so rapidly that they needed to retain most of their earnings to support their statutory capital requirements.  It appears like the hard market might be abating, so the subs might now be better positioned to dividend money up to the holdco. 

 

Whether closing out the TRS is a priority for holdco cash is yet another question.  There are many things that can be done with excess capital, and that might be a secondary or tertiary option.

 

 

SJ

 

Ideally,

1) the way this works is that Fairfax closes the TRS

2) counterparty dumps the FFH shares they were long as a hedge to the short-swap position

3) FFH price gets depressed

4) Fairfax keeps hoovering  up excess shares at depressed prices

[LC]

55 minutes ago, Viking said:

2.) We have no visibility into why they bought Sleep Country. There likely were many factors involved (P/C insurance capital levels, taxes, strategic fit within investment portfolio, strategic fit within total company, valuation, future prospects etc) - and we are largely in the dark. And no, I do not expect the management team at Fairfax to have to 'justify' every decision they make to investors.

 

 

Well I'd say if the goal is to convince the market that management is not making poor decisions (e.g. equity hedges) then they should be more transparent.

 

But otherwise I agree. It's not a tiny deal but it's not a huge one either.

I am not a huge fan of the mattress business in general. Does SleepCountry own its Real estate? Maybe Fairfax sees value there. 

 

I am just thinking - if I had 800MM or whatever to invest on Fairfax's behalf - is SleepCountry the best I could come up with?