Fairfax 2024

[StubbleJumper]

Well, that was an interesting slide-deck. 

 

The author was quite right to point out that FFH has not routinely beaten Prem's 15% BV growth target.  Every year, Prem publishes a table in his annual letter that depicts the growth in BV and the growth in share price.  If you exclude the first 10 or 12 years of rapid growth, it's been pretty pedestrian ever since.  However, FFH isn't trading at 1.5x BV either!  If it routinely achieved that 15% target, it would easily be worth 2x book, but it doesn't so it's not.  It really is a funny criticism.  As always, I highly recommend that people in this forum look at that table several time during the year and reflect upon whether the past three years represent a fundamental shift, meaning that 15% will be routinely achieved in the future, or whether whether it's a relatively brief favourable period.

 

There seems to be a great focus on what happened during 2020.  As I have suggested in the past, Prem came uncomfortably close to driving FFH into a wall during 2020.  He played his cards brilliantly to get through that particular set of challenges.  What the author should have done is to take Prem to task over having tapped into the revolving like of credit for general operational purposes before Covid19 even hit, which exposed the company to the revolver's covenants.

 

Most of the rest of the deck seems like silly-bugger stuff.  Clearly many of us have some discomfort with the various OMERS transactions and the fact that OMERS always seems to be effectively guaranteed an 8% or 9% return on its capital.  These transactions are, effectively, quasi-debt.  But, the really silly bugger stuff is pointing out the accounting gain triggered by the Odyssey transaction and the return for OMERS.  In what world does he think that Odyssey's true value wasn't far higher than its carrying value in 2021?  And in what world does he think it was a bad deal to "borrow" a billion even at 8% or 9% to buyback shares at US$500.  It beggars belief!

 

While all of that was a nice walk through the past where quality of earnings was a regular concern, perhaps he would be better served to look at the past couple of years and comment on the current quality of earnings.  The earnings for the past three years are real and they are large.  And the earnings for 2024 are real and are large.  The guy's proposed haircut to BV is roughly a year's worth of income at current run rates, so that's pretty funny.

 

 

SJ

[Santayana]

Wasn't the primary reason Fairfax had such a large IFRS adjustment because of the short duration of the bond portfolio?  He's says "too good be true" like they just made up the fact that they had a much shorter duration than most P&C companies. 

[Munger_Disciple]

2 minutes ago, Santayana said:

Wasn't the primary reason Fairfax had such a large IFRS adjustment because of the short duration of the bond portfolio?  He's says "too good be true" like they just made up the fact that they had a much shorter duration than most P&C companies. 

 

I am not an expert on IFRS, but doesn't it also have to do with discounting the insurance liabilities to come up with current fair value? In GAAP, the liabilities are un-discounted as I understand them. 

[Junior R]

my limit orders

 

FFH at $1200

FIH at  $13.50 

 

lets see if these get filled...I except next week these will recover  ...Fairfax really needs to cover the swaps its good when stock goes up but when it goes down its another story lol

Edited February 8 by juniorr

[Gregmal]

Another thing that’s kind of weird is how he more or less insulates that the proper valuation here is like 3-3.5x earnings? Even if they’re over earnings it’s still like what? 5-6x normalized? Kinda bizarre.

[Munger_Disciple]

9 minutes ago, Gregmal said:

Another thing that’s kind of weird is how he more or less insulates that the proper valuation here is like 3-3.5x earnings? Even if they’re over earnings it’s still like what? 5-6x normalized? Kinda bizarre.

 

Even if he is negative on Fairfax, you would think there are far better short options for him after this huge run up in tech stocks. 

Edited February 8 by Munger_Disciple

[Thrifty3000]

In 2011, when Jefferies was under attack, I remember the CEO, Richard Handler, started posting daily updates of their financial statements on the Jefferies website to show customers and investors the short thesis was wrong.

 

I'm curious if Prem could expedite the earnings release to today, open up the books for regulators and welcome them in with open arms, and then announce a million share buyback. Gotta pull out that elephant gun.

[Junior R]

18 minutes ago, Thrifty3000 said:

In 2011, when Jefferies was under attack, I remember the CEO, Richard Handler, started posting daily updates of their financial statements on the Jefferies website to show customers and investors the short thesis was wrong.

 

I'm curious if Prem could expedite the earnings release to today, open up the books for regulators and welcome them in with open arms, and then announce a million share buyback. Gotta pull out that elephant gun.

No need just let stock drop and buyback shares...They always mention Henry Singleton

[Viking]

1 hour ago, StubbleJumper said:

 

Excellent!  It's good to get that capital back and now that Prem is no longer part of the BoD, perhaps FFH will find a way to dispose of the equity investment.  It would be nice to close the books on this one.

 

SJ

+1. i am with you on this one.

[Junior R]

Just now, MMM20 said:

What’s stopping Prem from being like, “this sh*t again?” and getting together with OMERS or the Kuwaits or whoever and taking the whole of FFH private at $1100-1200 USD per share?

why just keep the company public and just announce a big buy back on earnings 

[Junior R]

2 minutes ago, MMM20 said:

So he doesn’t have to deal with this sort of BS anymore. 

but its ok as long as they still do good they can just keep buying back share..imagine share could goes down to 15m in the next 2 years

[StubbleJumper]

15 minutes ago, MMM20 said:

What’s stopping Prem from being like, “this sh*t again?” and getting together with OMERS or the Kuwaits and taking FFH private at US$1100-1200/share?

 

 

The Watsa family's economic interest in FFH isn't actually all that high.  There's about 20 million publicly owned shares, so Prem would need to find US$20-25 billion or so if he wanted to take it private.  And to find that $20 billion, it would certainly result in a loss of family control as part of the deal because who would offer up $20b and accept the existing dual-share structure?

 

 

SJ

[Viking]

So let me get this straight… you are shorting a company that is earning a record amount of ‘good’ earnings? Thats not in dispute. And you know they will be aggressive with share buybacks. 
 

You also know the stock has had a monster run and there are likely lots of shares in ‘weak hands’ - shareholders who are easily panicked. 
 

When is the best time to release your ‘report’? A week before earnings. When Fairfax is in a blackout period - and can’t respond properly or can’t buy back stock.
 

What do you think is likely to happen next week? Think we might see some buybacks?

 

So what is the play? Short a week before earnings. Make a quick 12% on the downside. Before earnings come out, flip to a long position and make another 12% as the stock recovers. Make 24% return over a month or two. Add a little leverage. That is a pretty good trade. 
 

This looks an awful lot like what used to happen to Fairfax back in 2003-2005 when it still traded on the NYSE. Back then it happened a couple of times a year. I made a lot of money over the years playing the big swings in Fairfax’s stock price.

 

Is anyone else experiencing deja vu?

Edited February 8 by Viking

[Hektor]

1 hour ago, Thrifty3000 said:

Prem could expedite the earnings release to today, open up the books

I hope he doesn't

[Daphne]

I backed up the truck when it hit $89 back in the day. Been smiling ever since.

[Hektor]

44 minutes ago, juniorr said:

No need just let stock drop and buyback shares...They always mention Henry Singleton

+1

[Junior R]

11 minutes ago, Viking said:

So let me get this straight… you are shorting a company that is earning a record amount of ‘good’ earnings? Thats not in dispute. And you know they will be aggressive with share buybacks. 
 

You also know the stock has had a monster run and there are likely lots of shares in ‘weak hands’ - shareholders who are easily panicked. 
 

When is the best time to release your ‘report’? A week before earnings. When Fairfax is in a blackout period - and can’t respond properly or can’t buy back stock.
 

What do you think is likely to happen next week? Think we might see some buybacks?

 

So what is the play? Short a week before earnings. Make a quick 12% on the downside. Before earnings come out, flip to a long position and make another 12% as the stock recovers. Make 24% return over a month or two. Add a little leverage. That is a pretty good trade. 
 

This looks an awful lot like what used to happen to Fairfax back in 2003-2005 when it still traded on the NYSE. Back then it happened a couple of times a year. I made a lot of money over the years playing the big swings in Fairfax’s stock price.

 

Is anyone else experiencing deja vu?

 

Exactly ... I am pretty sure there could be some surprise next week ...like a buyback or soemthing...This isn't really deja vu as $FFH is now firing on all cylinders...Plus today Prem leaves $BB board they are learning from mistakes   

[ander]

14 minutes ago, Viking said:

So let me get this straight… you are shorting a company that is earning a record amount of ‘good’ earnings? Thats not in dispute. And you know they will be aggressive with share buybacks. 
 

You also know the stock has had a monster run and there are likely lots of shares in ‘weak hands’ - shareholders who are easily panicked. 
 

When is the best time to release your ‘report’? A week before earnings. When Fairfax is in a blackout period - and can’t respond properly or can’t buy back stock.
 

What do you think is likely to happen next week? Think we might see some buybacks?

 

So what is the play? Short a week before earnings. Make a quick 12% on the downside. Before earnings come out, flip to a long position and make another 12% as the stock recovers. Make 24% return over a month or two. Add a little leverage. That is a pretty good trade. 
 

This looks an awful lot like what used to happen to Fairfax back in 2003-2005 when it still traded on the NYSE. Back then it happened a couple of times a year. I made a lot of money over the years playing the big swings in Fairfax’s stock price.

 

Is anyone else experiencing deja vu?

Doubt MW is playing it long after covering but who knows. But wouldn't be surprised if they're wary of index inclusion with the timing of this report -- cover before Fairfax added to index maybe.

[Castanza]

Added a good amount at 913-915.....would love to see this hit October prices; but with earnings soon, not sure we will get there. 

[KFS]

3 hours ago, MMM20 said:

This is where the tyranny of the book value people gets ridiculous. I can personally come up with twice his 18% number in fair value over carrying value and show that book value is at least 18% understated. He ignores the fact that cash flow has exploded 3-4x structurally higher over the past few years and that the stock is now trading at 6-8x those cash flows. All of the historical transactions can be explained by the fact that they were short on cash for a few years... but they're not anymore. The irony is he nailed the GE comparison... in the Danaher / Culp era. Decentralization, quality upgrades, massive turnaround, and now a well-run cash machine. 

 

 

Well said.  Even there is merit to certain "accounting gimmicks" in the MW report, the impact feels pretty silly and pointless in the overall picture.  Even if you discount the book by 30%, it is still trading cheaper than peers.

 

And then you have other items like the big pet insurance sale ($1.4 billion in 2022 ??) that seemingly came out of nowhere.  If anything, Fairfax might have been guilty of understating itself.  

 

Consider incentives/behaviors.  In 2020, Prem stepped in with his own money and purchased a whopping $150 million worth of shares during the fear and uncertainty of covid.  He knew the intrinsic value of the business.  FFH has made significant buybacks.  Since the recent runup in stock price, Prem hasn't sold any shares, the company hasn't issued shares, and they still hold the TRS position.  This would be very weird behavior for a company that is allegedly desperately trying to overstate its value via "gonzo-mode financial engineering."  

 

The cash flow is what matters to me.  With the amount of cash that will be gushing into FFH over the next few years, it would be pretty entertaining to watch the stock drop 30% only for the company to jump in with monster buybacks.  One can dream.  

 

 

 

 

 

[Ghost]

I am a bit disappointed that the stock didn't fall some more.  I already added to my positions, would love to add more at another 10% decline.  

 

One can dream. 

[MMM20]

"P/E of 6.3x (using 2024 consensus EPS) versus U.S. peers that trade at 14.7x on average. The integrity of underwriting margins or investment income is not in question. In our view, quibbling about the perceived variance between fair value and carrying value of balance sheet assets overlooks the significant expansion of earnings power that is clearly not getting the same degree of recognition in the public markets as peers."

 

 

 

Edited February 8 by MMM20

[thepupil]

well I'm just glad the board's (at time irrational) hatred of short sellers will be reinforced for decades to come. Guarantees my role as resident short seller apologist for a long time. 

 

this one seems pretty myeh...

[MMM20]

7 minutes ago, thepupil said:

well I'm just glad the board's (at time irrational) hatred of short sellers will be reinforced for decades to come. Guarantees my role as resident short seller apologist for a long time. 

 

Just not a fan of the smash and grab... and seems clear that this is probably one of those, no?

 

Need regulation around minimum holding periods for short sellers who choose to go public.

 

Edited February 8 by MMM20

[MMM20]

Here's the hard hitting analysis from everyone's favorite FFH analyst...

 

"Short-seller Muddy Waters released a report outlining a bear case on no-moat Fairfax. At a high level, we don’t disagree with its take, and we do think the stock is materially overvalued right now. In our opinion, Fairfax is a hit-and-miss investor, a relatively poor underwriter, and has an overly complicated structure. We would agree that the company’s book value growth target of 15% is unrealistic, and it has generally fallen well short of this level since the financial crisis. As to Muddy Waters' claims that Fairfax is mismarking investments, we don’t think it is necessary to believe that to think the stock is overvalued. We will maintain our CAD 970 fair value estimate."

 

Edited February 8 by MMM20