Fairfax 2024

[Viking]

24 minutes ago, 73 Reds said:

Viking, always enjoy your posts - thanks.  To me the issue is a simple one, provided you are a long term investor with available capital.  Market driven price volatility is always welcome.  However, if price volatility is company-specific, the phrase "know what you own" is all that matters.  

 

@73 Reds thanks for the feedback. I am going to dig into the 'company specific' part of your comment with my next post. My guess is lots of Fairfax's current shareholders are still seeing the ghosts of Fairfax's past. This will lead them to manufacture 'company-specific' issues that don't actually exist (and lead them to sell their position). This is one of the reasons why I expect Fairfax shares to be more volatile going forward (particularly to the downside). And as I said, that will likely provide Fairfax with a wonderful opportunity to take out a meaningful amount of shares in the coming years.

 

"know what you own" - bingo! That is the key that unlocks the treasure chest.

Edited August 8, 2024 by Viking

[Luke]

"Know what you own"-> Cant know a stock without holding it for a certain amount of time and as Pabrai said: Once the stock goes down -40% then you start to REALLY understand and learn what the business is about xD 

[hardcorevalue]

Only 29% more drawdown to go I guess

 

That would certainly fine tune some of our thinking!

[UK]

https://www.ft.com/content/80abe7c0-e722-4224-8bf2-77bacab195f5

 

The head of Munich Re, the world’s biggest reinsurer, expects the benign conditions that have powered record profits for the industry, but increased costs for businesses and households, to be sustained in coming months.

Munich Re was one of a string of companies to report bumper profits on Thursday, helped by a steep increase in the cost of both insuring and reinsuring properties against natural catastrophes in recent years.

This has fed through to more expensive cover for consumers and businesses, contributing to an affordability crisis in some parts of the world.

The boom in profits had led to expectations that prices would begin to fall as new providers were drawn to the market.

But Munich Re chief executive Joachim Wenning said on Thursday that he does not anticipate any “softening” in the reinsurance market ahead of the key policy renewals that happen at the end of the year, of which property catastrophe cover is a major part.

“We are very confident that the market environment . . . will be unchanged, meaning highly attractive,” he said. 

Munich Re, a heavyweight in the property catastrophe reinsurance market, reported a record €3.8bn of post-tax profits in the first half, helped also by a strong performance from other areas. Beazley and Lancashire, two Lloyd’s of London firms that offer property insurance and reinsurance, alongside other types of cover, also made record profits. 

Executives argue that the reinsurance sector is still playing catch-up after years of underwriting losses before prices began to pick up in 2022. Reinsurers “have to earn now what they couldn’t earn for so long,” Wenning said.

Reinsurers have also recently benefited from a quieter period for major disasters such as hurricanes, and by tightening their policies to reduce their exposure to events such as storms and floods. Those events have weighed more on mass-market home insurers, particularly in the US where many state regulators cap pricing for local providers. 

London-listed Beazley reported pre-tax profits doubled to a record $729mn in the first half, lifted by a strong underwriting performance and higher returns on its investment portfolio.

Its combined ratio — a measure of claims and expenses as a proportion of premiums — improved from 88 per cent to 81 per cent. Beazley said it would probably hit around 80 per cent for the full year, sending its shares up 11 per cent in London.

Chief executive Adrian Cox said the performance was a mixture of good risk selection and higher prices.

The property reinsurance segment was likely to soften first, given that insurers have paid out significant claims for extreme weather, he said.

“There are lots of losses [for insurers]. It might get a bit more competitive but I think it’ll be less so than the reinsurance,” Cox said.

Lancashire’s post-tax profits, also published on Thursday, were up a quarter from the prior period to $201mn in the first half.

Chief executive Alex Maloney said he expected any softening in the property insurance market to be gradual.

“You don’t go from a great market to a terrible market in a year,” he said. “It never happens that way.”
 

[Parsad]

5 hours ago, StubbleJumper said:

I find it interesting how the sentiment on this board has swung wildly over the past week or 10 days.  Immediately following the Q2 release, posters in this forum were almost euphoric about the EPS numbers, the CRs, and interest income.  A short week later, some are almost despondent about Mr. Market suddenly spurning FFH's shares!

 

Whatever.  The hard market had to abate eventually and the central bank tightening process was always likely to stop and potentially reverse.  In the mean time, the shares closed yesterday at US$1050, which is pretty much bang-on with BV adjusted for the excess of fair value over carrying value.  Barring some sort of outrageous growth in the CR, we know that FFH will earn a tonne of money for the next 2 or 3 years, and somebody holding the shares at 1x BV today will likely do perfectly well if those shares are still valued at 1x adjusted BV on Dec 31, 2026.

 

The nice thing about this market pull-back is that FFH actually seems to be serious about repurchasing its shares.  I am a cheap bastard and have always been so.  When I saw the level of repurchases in Q2, I had a few migivings about it because I didn't view FFH's shares to be table-pounding cheap during the quarter.  We can all debate about exactly how high intrinsic value is for FFH - some will suggest 1.2x, BV some will be ballsier and suggest 1.4x or 1.5x - but in any event, we are back down to a share price that strikes me as a no-brainer for repurchases.  Even the cheapest bastards (like me) know that FFH is likely worth at least 1.2x adjusted BV.  It's nice to see that the company once again has a target for deploying potentially significant amounts of capital in a manner that will create value for continuing shareholders.

 

Just like the Muddy Waters kerfuffle, this is an opportunity rather than a problem.

 

 

SJ

 

+1!  Cheers!

[MMM20]

5 hours ago, StubbleJumper said:

I find it interesting how the sentiment on this board has swung wildly over the past week or 10 days.  Immediately following the Q2 release, posters in this forum were almost euphoric about the EPS numbers, the CRs, and interest income.  A short week later, some are almost despondent about Mr. Market suddenly spurning FFH's shares!

 

Whatever.  The hard market had to abate eventually and the central bank tightening process was always likely to stop and potentially reverse.  In the mean time, the shares closed yesterday at US$1050, which is pretty much bang-on with BV adjusted for the excess of fair value over carrying value.  Barring some sort of outrageous growth in the CR, we know that FFH will earn a tonne of money for the next 2 or 3 years, and somebody holding the shares at 1x BV today will likely do perfectly well if those shares are still valued at 1x adjusted BV on Dec 31, 2026.

 

The nice thing about this market pull-back is that FFH actually seems to be serious about repurchasing its shares.  I am a cheap bastard and have always been so.  When I saw the level of repurchases in Q2, I had a few migivings about it because I didn't view FFH's shares to be table-pounding cheap during the quarter.  We can all debate about exactly how high intrinsic value is for FFH - some will suggest 1.2x, BV some will be ballsier and suggest 1.4x or 1.5x - but in any event, we are back down to a share price that strikes me as a no-brainer for repurchases.  Even the cheapest bastards (like me) know that FFH is likely worth at least 1.2x adjusted BV.  It's nice to see that the company once again has a target for deploying potentially significant amounts of capital in a manner that will create value for continuing shareholders.

 

Just like the Muddy Waters kerfuffle, this is an opportunity rather than a problem.

 

 

SJ

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!
 

Edited August 8, 2024 by MMM20

[Thrifty3000]

IDBI Bank

 

IDBI Market Cap: $12 billion USD (FFH Market Cap: $25 billion USD)

IDBI Net Earnings: $670 million USD

Market Cap at time the sale was announced in 2022: Approx $8 billion

Amount being sold: 61% (Currently worth $7.3 billion)

 

Fairfax India Total Assets: $3.6 billion

 

IDBI 3 Year Net Earnings Trend:

 

 

^ feels like this is way bigger than Fairfax India and I have a hunch Prem is going to want all he can eat of this one. This is an example of a deal with a high probability of being a better use of funds than share buybacks.

 

If bank performance is largely a reflection of the region's economic performance, then I'd love to own a good bank in the world's fastest growing economy.

 

 

Edited August 8, 2024 by Thrifty3000

[glider3834]

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

[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?