Luke Posted July 22, 2024 Posted July 22, 2024 44 minutes ago, SafetyinNumbers said: The equity component is less than a quarter’s earnings and It’s got a growing earnings yield higher than treasuries. I prefer them buying assets vs buybacks to a certain extent because it increases durability but I know I’m in the minority on that point. I agree that asset durability is important and i understand the acquisition from that POV. I also thought it was USD denominated but its CAD...confusing, not as large as I thought
Viking Posted July 22, 2024 Posted July 22, 2024 (edited) Fairfax - Unconstrained Capital Allocation All P/C insurance companies have two engines to drive earnings/business results over time: Insurance Investments Insurance Pretty much all P/C insurance companies try and do the same thing with their insurance operations - they try and generate an underwriting profit. Some are better at it than others. The combined ratio communicates how a company’s insurance business is performing. Investments Pretty much all P/C insurance companies generally do the same thing with their investment portfolio - they invest it primarily in bonds. The average yield on the investment portfolio communicates how a company’s investments are performing. Investors As a result, it is a pretty simple process for investors to evaluate most insurance companies. Warren Buffett Warren Buffett screwed everything up back in 1967 when Berkshire Hathaway purchased National Indemnity, a P/C insurance company. How did Buffett screw things up? Buffett knew something that apparently no one else at the time knew: equities earn a much higher return over time than bonds. So after he bought National Indemnity he began to put some of its investment portfolio into equities. And what was the result? Magic. Excess returns + compounding + time = exponential growth. And that is what happened to Berkshire Hathaway’s earnings and stock price. It was like Buffett had found a golden goose. Capitalism We all know how capitalism works. When someone discovers a better mousetrap - begins earnings outsized profits - everyone else will rush in and copy the better business model. And quickly compete the outsized returns away. And that is what happened. All the big P/C insurance companies began investing a part of their investment portfolio into equities and their returns over time improved markedly. And their investors made out like bandits. EXCEPT THAT IS NOT WHAT HAPPENED. Almost all P/C insurance companies did not copy what Warren Buffett was doing at Berkshire Hathaway. Why not? Are other P/C insurance companies run by stupid people? The fly in the ointment - Wall Street Volatility Efficient Market Hypothesis and Modern Portfolio Theory When it comes to equities, Wall Street says volatility is the same thing as risk. Stocks ARE volatile. So Wall Street decided this also meant that stocks were also very risky - and therefore more likely to go down in value. Of course, this is garbage. Here is what Warren Buffett had to say about risk at the BRK’s AGM in 1994: “We do define risk as the possibility of harm or injury. And in that respect we think it’s inextricably wound up in your time horizon for holding an asset. I mean, if your risk is that if you intend to buy XYZ Corporation at 11:30 this morning and sell it out before the close today, in our view that is a very risky transaction. Because we think 50 percent of the time you’re going to suffer some harm or injury. If you have a time horizon on a business, we think the risk of buying something like Coca-Cola at the price we bought it at a few years ago is essentially so close to nil, in terms of our perspective holding period. But if you asked me the risk of buying Coca-Cola this morning and you’re going to sell it tomorrow morning, I say that is a very risky transaction.” Short term focus Most P/C insurance companies are publicly traded companies. They are beholden to what Wall Street wants. Wall Street wants companies to hit quarterly earnings estimates - if a company misses, their stock usually gets punished. If this happens too many times, the CEO likely loses his job. Incentives matter. Most CEO’s want to keep Wall Street happy. As a result, they avoid volatility like the plague. The insurance business is volatile enough. Adding volatility to the investment side of the business is a bridge too far for most P/C insurance executives. So they have no interest in investing in equities. The odd ducks Well, there are a few odd ducks that decided to follow Warren Buffett’s lead: Markel Fairfax Financial What allowed these misfits to thumb their nose at Wall Street? Ownership structure Warren Buffett can do what he wants with Berkshire Hathaway because he is in control of the company. It just so happens the other two companies also have controlling shareholders: Markel - Markel family Fairfax Financial - Prem Watsa Long term focus This ownership structure allows each of these companies to focus on long term value creation for their shareholders. Higher lumpy returns (investing in equities) are preferred to lower smooth returns (investing exclusively in bonds). This can’t be right. This sounds too easy. How have these 3 companies performed over time? The long term performance of each of these 3 companies (since inception for each) has been epic. How did they achieve such impressive results? Their P/C insurance business was better than average (much better in the case of Berkshire Hathaway). But their outperformance overwhelmingly came from their investment results and their capital allocation decisions. What about today? A fork in the road. Berkshire Hathaway was so successful at investing in equities that it decided it wanted to own entire companies. This begat more success. Over the past 20 years, Berkshire Hathaway has morphed into a very successful conglomerate, with P/C insurance now only one part of a much larger company. Markel is doing its best to follow in Berkshire Hathaway’s footsteps and become a conglomerate itself. What about Fairfax Financial? Fairfax appears to have little interest in becoming a conglomerate like Berkshire Hathaway (notwithstanding their just announced purchase of Sleep Country). In fact, today Fairfax’s business model looks unique in the P/C insurance industry. Their uniqueness is not on the P/C insurance side of things. Here they have built one of the finest P/C insurance operations anywhere. They have a wonderful global platform. And they have forged a culture of strong underwriting discipline. All of this is similar to other well run P/C insurance companies. Fairfax’s uniqueness comes from how they approach capital allocation. Their approach is very different from traditional P/C insurance companies. And today it is also very different from the approach employed by both Berkshire Hathaway and Markel. When it comes to capital allocation, Fairfax is breaking new ground. Capital allocation Traditional P/C insurers At most P/C insurers, capital allocation is handled in a very traditional / straight forward manner. The basic options are captured in the table below. Berkshire Hathaway & Markel At Berkshire Hathaway and Markel, capital allocation is focussed on building long term shareholder value. But when it comes to capital allocation, certain options are not used and others are frowned upon. 1.) Assets are not sold. Buy and hold (ideally forever) is the goal. Therefore, this source of capital is generally not available. 2.) Equity is used in very limited way. Rarely is equity issued as a source of capital (looking at the past 10 years). Equity is used modestly used as a use of capital (share buybacks). 3.) Neither company pays a dividend. Fairfax Financial Setting the table: The most important source of capital is 'cash flow from operations'.' Fairfax is generating a record amount of cash flow from operations - and this record amount is expected to continue (and grow) in the coming years. Unlike traditional P/C insurance companies and Berkshire Hathaway and Markel, Fairfax uses all the capital allocation options at its disposal. But there is even more. Fairfax is finding new and innovative ways to allocate capital. They are doing some things that haven’t been seen from a P/C insurance company before. Like bringing minority equity partners on board when making large P/C insurance acquisitions. Fairfax has taken Warren Buffett’s original idea and made it even better: unconstrained capital allocation. The restaurant menu is stocked with choices: Sources of capital. Uses of capital. Internal. External. When it comes to capital allocation, Fairfax’s top priority is to be securely financed. After that, the goal is to allocate capital in a way that it results in the greatest long term per share value creation for shareholders. The key with this approach is to be: Open minded. Flexible. Creative. Opportunistic. Conviction - go big. With this capital allocation framework you take what Mr. Market gives you. And that is what Fairfax has been doing. Delivering a master-class in capital allocation. Here are some recent examples of what Fairfax has done: More than doubled the size (per share) of the P/C insurance business (NPW) over the past 5 years from $442/share in 2018 to $996/share in 2023. In late 2020/early 2021, purchased total return swaps - getting exposure to 1.96 million Fairfax shares at $373/share. This investment has increased in value by $1.5 billion over the past 3.5 years. In late 2021, via dutch auction, bought back 2 million Fairfax shares at $500/share. At March 31, 2024, Fairfax’s book value was $945/share. In late 2021, sold $5.2 billion in corporate bonds and shortened average duration of fixed income portfolio to 1.2 years - which shielded Fairfax’s balance sheet from billions in losses when interest rates spiked in 2022/2023. In 2022, sold the pet insurance business and realized a $1 billion gain after-tax. In 2022, sold Resolute Forest Products for $626 million (plus $183 million CVR) at the peak of the lumber market. In 2023, took out majority partner (KIPCO) and increased ownership in Gulf Insurance Group from 44% to 90% for total consideration of $740 million, securing Fairfax’s future in growing MENA region. In late 2023, extended the average duration of fixed income portfolio to about 3 years, locked in record interest income of $2 billion/year for the next 3 or 4 years. In January 2024, increased dividend by 50% to $15/share. In June 2024, Fairfax’s P/C insurance company in India, Digit, completed its successful IPO. In July 2024, sold Stelco (pending approvals) for consideration of $666 million, an 87% premium to where the stock had been trading. The list above is just a start. It really is amazing what Fairfax has been able to accomplish over the past 5 years. What really stands out is the number of tools - the breadth of options - that they have in their capital allocation toolkit today. They are proficient at using all of the tools. And they are using all of them: Organic growth Acquisitions Asset sales IPO Stock buybacks And look at the size/magnitude of the activities - many were +$1 billion in impact. The per share value creation for shareholders has been impressive. Importantly, Fairfax is not trying to copy someone else - like Berkshire Hathaway. Instead, Fairfax is now blazing their own trail. They are focussed on doing what they are really good at. Fairfax looks like a star athlete that is just hitting their prime. They have building towards this moment for 38 years. ————— If you want to better understand what is happening at Fairfax today you might want to read the following book. And pay special attention to the chapter on Henry Singleton - someone who will be the topic of a future post. “An outstanding book about CEOs who excelled at capital allocation.” Warren Buffett The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success by William Thorndike https://www.amazon.ca/Outsiders-Unconventional-Radically-Rational-Blueprint/dp/1422162672 Edited July 22, 2024 by Viking
Hoodlum Posted July 22, 2024 Posted July 22, 2024 22 hours ago, Santayana said: That's multiple years of earnings for CrowdStrike, will be interesting to see who ends up paying. It looks like CrowdStrike's CEO was also in leadership at McAfee in 2010 when there was a similar outage. Four months later McAfee was purchased by Intel. It will be interesting to see how CrowdStrike is able to handle this.
Parsad Posted July 22, 2024 Posted July 22, 2024 7 hours ago, newtovalue said: Sleep country actually owns two of the biggest DTC Canadian brands - Casper and Endy It's also better managed than similar companies in the U.S. It's not a game-changing acquisition, but it's not a bad one. The price seems fair to both parties...not a steal on either side. Cheers!
Viking Posted July 22, 2024 Posted July 22, 2024 (edited) 1 hour ago, Parsad said: It's also better managed than similar companies in the U.S. It's not a game-changing acquisition, but it's not a bad one. The price seems fair to both parties...not a steal on either side. Cheers! Some initial thoughts: I think Sleep Country has been quite the success story over the past 30 years. Interesting to see Fairfax buying the whole company. This will be a significant add to the 'non-insurance consolidated' group of companies (Thomas Cook India, Recipe, Grivalia Hospitality, Dexter etc). It will be interesting to see if Fairfax keeps growing this bucket of companies. Fairfax has been heavily invested in this segment over the past decade, more recently with Leon's (the largest furniture retailer in Canada) and with The Brick before that. Bill Gregson, former CEO of the Brick, was probably involved. I wonder who the driver was of this deal: Prem / Wade / Other? Regardless, it will be interesting to hear what Wade Burton has to say about it on the Q2 conference call. Fairfax is buying Sleep Country at what must be at close to the bottom of the cycle. IF this is the kind of business you want to own - now is probably the right time to buy it. The housing market in Canada is terrible right now (interest rates ARE biting here). Another big private transaction. And another publicly traded holding is gone (Stelco). The publicly traded (especially the mark to market) part of Fairfax's equity holdings has been dramatically shrinking in recent years. The private part has been rapidly growing. Are more asset sales (like Stelco) on the way? What I want to know about Sleep Country (I know nothing about the company, other than it is usually where we shop - and have for decades - when we buy a new mattress set): How good is the management team? If they are good, are they all sticking around? What is the normalized earnings power of this business? How stable are earnings? What are the prospects for the business? What are the strategic reasons for this purchase? Cash cow type of business to be milked over time? Does this signify a trend to more aggressively grow the 'non-consolidated' bucket of holdings? Edited July 22, 2024 by Viking
gfp Posted July 23, 2024 Posted July 23, 2024 Just now, Haryana said: Should be US$1.24 billion? "Sleep Country Canada Holdings ZZZ-T on Monday agreed to be acquired by a unit of insurer Fairfax Financial in a deal valued at C$1.7 billion ($1.24 billion)." https://www.theglobeandmail.com/investing/markets/stocks/ZZZ-T/pressreleases/27524271/fairfax-to-purchase-sleep-country-in-17-billion-deal/ That is the enterprise value, not the cash outlay for 100% of the equity of the business. I'm not sure if they are including lease accounting as "debt" in that figure but the best I can see there are around 35 million fully diluted shares of ZZZ that FFH is buying for $35 CAD each. 35 times 35 is CAD 1.225B and that is around $890m USD
UK Posted July 23, 2024 Posted July 23, 2024 2 minutes ago, Haryana said: Should be US$1.24 billion? "Sleep Country Canada Holdings ZZZ-T on Monday agreed to be acquired by a unit of insurer Fairfax Financial in a deal valued at C$1.7 billion ($1.24 billion)." https://www.theglobeandmail.com/investing/markets/stocks/ZZZ-T/pressreleases/27524271/fairfax-to-purchase-sleep-country-in-17-billion-deal/ I think this number includes existing debt.
Haryana Posted July 23, 2024 Posted July 23, 2024 1. An angle of a mini hedge on falling interest rates - https://www.theglobeandmail.com/investing/investment-ideas/number-cruncher/article-8-canadian-retailers-poised-to-benefit-from-falling-interest-rates/ 2. One interesting point worth repeating is that they have 40% market share in Canada. 3. Interesting quotes from the article - https://www.theglobeandmail.com/business/article-fairfax-financial-sleep-country-canada-zzz/ ... “I’m not interested in selling at a distressed price because we don’t need to,” Mr. Schaefer said. “We are this great business. We have a strong balance sheet. We’re not worried about economic recessions. I’ve lived through, I don’t know how many stock market crashes and recessions. Everybody needs mattresses. Even if they put a pause on this discretionary spend, they’re eventually going to come back.” ... “I will tell you that I am fearful that there will be a slowdown, and I feel it’s knocking on the door,” Mr. Schaefer said. On the other hand, he added that this could mean further possible acquisitions becoming available for Sleep Country to consider. “When we do see slowdowns, it does create opportunities – maybe here in Canada, maybe outside of Canada – and having a strong financial sponsor behind you may create opportunities that are beyond Canada.” ... “This asset is one of the crown jewels – in my personal opinion because I work here – of retailers in Canada. And Prem was the only one that truly recognized that,” Mr. Schaefer said. “I think he thinks very, very long-term."
glider3834 Posted July 23, 2024 Posted July 23, 2024 (edited) 2 hours ago, gfp said: That is the enterprise value, not the cash outlay for 100% of the equity of the business. I'm not sure if they are including lease accounting as "debt" in that figure but the best I can see there are around 35 million fully diluted shares of ZZZ that FFH is buying for $35 CAD each. 35 times 35 is CAD 1.225B and that is around $890m USD yes looks like that CAD 1.7B TEV figure includes lease liabilities Edited July 23, 2024 by glider3834
Thrifty3000 Posted July 23, 2024 Posted July 23, 2024 (edited) On 7/22/2024 at 4:16 PM, KPO said: On the surface this seems like a low quality acquisition unless there’s some structural reason that I’m missing as to why this business is better than failing counterparts in the US (e.g Mattress Firm). Retail bedding just seems a tough business with no moat, plus the Costco’s of the world and e-commerce can cherry pick. I just scanned ZZZ’s financials on Morningstar: - book value has compounded by roughly 15% annually since 2014 - net earnings were basically negative ten years ago and have steadily grown to an average $120 million for the last 3 years - cash from operations has been steadily around $160 million for the last 4 years At first glance it seems like FFH has offered a fair price for a solidly performing asset. Seems like a perfectly good way to further diversify. Edited July 23, 2024 by Thrifty3000
glider3834 Posted July 24, 2024 Posted July 24, 2024 On 7/20/2024 at 5:53 AM, Hoodlum said: There could be some impact from today's outages, related to Cyber Insurance coverage. https://www.reinsurancene.ws/bi-claims-the-likely-focus-of-insured-losses-from-microsoft-it-outage-say-analysts/ Fairfax is the 3rd largest company providing coverage in the US. https://www.reinsurancene.ws/chubb-remains-the-largest-writer-of-cyber-insurance-am-best/ still early days but we have had some updates now from Beazley & WR Berkley - also Evan Greenberg possibly might provide commentary on Chubb's call tomorrow https://www.reinsurancene.ws/crowdstrike-outage-unlikely-to-materially-impact-re-insurer-results-fitch/ 'So far, prominent cyber underwriter Beazley has said that it will not change its current undiscounted combined ratio guidance of low-80s for its full year 2024 results in light of the event, while W.R. Berkley said it does not see the incident as a material loss to the company. No doubt other insurers and reinsurers will also comment on the IT outage in the coming days and weeks as second quarter results are announced, which should provide a clearer picture of where the ultimate insurance industry loss might fall.'
Hoodlum Posted July 24, 2024 Posted July 24, 2024 7 hours ago, glider3834 said: still early days but we have had some updates now from Beazley & WR Berkley - also Evan Greenberg possibly might provide commentary on Chubb's call tomorrow https://www.reinsurancene.ws/crowdstrike-outage-unlikely-to-materially-impact-re-insurer-results-fitch/ 'So far, prominent cyber underwriter Beazley has said that it will not change its current undiscounted combined ratio guidance of low-80s for its full year 2024 results in light of the event, while W.R. Berkley said it does not see the incident as a material loss to the company. No doubt other insurers and reinsurers will also comment on the IT outage in the coming days and weeks as second quarter results are announced, which should provide a clearer picture of where the ultimate insurance industry loss might fall.' thanks for posting this. This last comment from Berkley provides some high level guidance. He was also asked as a percentage of net written premiums, what proportion of the firm’s overall book might that size to, to which he replied “less than a couple of percent.”
Parsad Posted July 24, 2024 Posted July 24, 2024 https://www.cnn.com/2024/07/24/tech/crowdstrike-outage-cost-cause/index.html Losses are now going to be over $5B...that's kind of what I expected. Fairfax may take a little hit here, but business interruption insurance losses tend to drag out for years. Cheers!
StubbleJumper Posted July 24, 2024 Posted July 24, 2024 57 minutes ago, Parsad said: https://www.cnn.com/2024/07/24/tech/crowdstrike-outage-cost-cause/index.html Losses are now going to be over $5B...that's kind of what I expected. Fairfax may take a little hit here, but business interruption insurance losses tend to drag out for years. Cheers! Is it insurable under business interruption, or is it cyber? Thinking back to the pandemic, doesn't business interruption require that access to physical facilities be interrupted for more than 24 hrs? Not sure what insurance hit there would be in this case. SJ
gfp Posted July 24, 2024 Posted July 24, 2024 (edited) I think it falls under Cyber and not all Cyber policies cover non-malicious attacks. This is just a fuck-up. Not all fuck-ups are insured. That's what lawsuits against the vendor are for! edit: and if anything came out of the pandemic era lawsuits it would be tightened-up Business Interruption policy language. You want coverage for something non-typical BI? Pay for it a-la-carte. Edited July 24, 2024 by gfp
glider3834 Posted July 24, 2024 Posted July 24, 2024 (edited) On 7/23/2024 at 9:18 AM, Viking said: Some initial thoughts: I think Sleep Country has been quite the success story over the past 30 years. Interesting to see Fairfax buying the whole company. This will be a significant add to the 'non-insurance consolidated' group of companies (Thomas Cook India, Recipe, Grivalia Hospitality, Dexter etc). It will be interesting to see if Fairfax keeps growing this bucket of companies. Fairfax has been heavily invested in this segment over the past decade, more recently with Leon's (the largest furniture retailer in Canada) and with The Brick before that. Bill Gregson, former CEO of the Brick, was probably involved. I wonder who the driver was of this deal: Prem / Wade / Other? Regardless, it will be interesting to hear what Wade Burton has to say about it on the Q2 conference call. Fairfax is buying Sleep Country at what must be at close to the bottom of the cycle. IF this is the kind of business you want to own - now is probably the right time to buy it. The housing market in Canada is terrible right now (interest rates ARE biting here). Another big private transaction. And another publicly traded holding is gone (Stelco). The publicly traded (especially the mark to market) part of Fairfax's equity holdings has been dramatically shrinking in recent years. The private part has been rapidly growing. Are more asset sales (like Stelco) on the way? What I want to know about Sleep Country (I know nothing about the company, other than it is usually where we shop - and have for decades - when we buy a new mattress set): How good is the management team? If they are good, are they all sticking around? What is the normalized earnings power of this business? How stable are earnings? What are the prospects for the business? What are the strategic reasons for this purchase? Cash cow type of business to be milked over time? Does this signify a trend to more aggressively grow the 'non-consolidated' bucket of holdings? viking I am not on the ground as you are in Canada, but I saw this article with quarterly survey by Stifel suggesting that while discretionary spending intentions are still weak there are perhaps signs consumer confidence is starting to improve. https://retail-insider.com/retail-insider/2024/07/canadian-consumer-spending-intentions-show-surprising-rebound-stifel-survey-reveals/?utm_source=rss&utm_medium=rss&utm_campaign=canadian-consumer-spending-intentions-show-surprising-rebound-stifel-survey-reveals Few quotes that look relevant to Sleep Country & mattress demand “Surprisingly, spending intentions are up sequentially in most of the categories we track and near a one-year-high. Categories such as mattresses, powersports, dollar stores, the pet industry, apparel and toys are all at or near a one-year-high,” said the report. “While our survey suggests improvement in Canadian consumer confidence, spending intentions are still in a pattern of contraction with 52 per cent of respondents being likely or very likely to reduce their discretionary spending over the next 12 months. Despite that, these results piqued our curiosity and suggest investors should start to think about how to position their portfolio under a scenario where Canadian consumer confidence returns to an expansionary mode. Our survey results are positive for Sleep Country, Dollarama, Aritzia, Gildan, Pet Valu, KITS, BRP, and Spin Master. “In our view, the results paint an accurate picture of the state of the Canadian consumer and historically the results have been generally a good indication of upcoming financial performance of our companies under coverage.” 'Signs of demand recovery within the mattress industry continues. The demand environment for mattresses in Canada has been challenging for the past two-plus years. However, our survey results suggest that the outlook is improving with spending intentions up for two consecutive quarters, and with July 2024 showing the strongest spending intentions since March 2022. Hence, we could see a scenario for a rapid pickup in demand as the economic environment improves;' Edited July 24, 2024 by glider3834
Viking Posted July 25, 2024 Posted July 25, 2024 (edited) 5 hours ago, glider3834 said: viking I am not on the ground as you are in Canada, but I saw this article with quarterly survey by Stifel suggesting that while discretionary spending intentions are still weak there are perhaps signs consumer confidence is starting to improve. https://retail-insider.com/retail-insider/2024/07/canadian-consumer-spending-intentions-show-surprising-rebound-stifel-survey-reveals/?utm_source=rss&utm_medium=rss&utm_campaign=canadian-consumer-spending-intentions-show-surprising-rebound-stifel-survey-reveals Few quotes that look relevant to Sleep Country & mattress demand “Surprisingly, spending intentions are up sequentially in most of the categories we track and near a one-year-high. Categories such as mattresses, powersports, dollar stores, the pet industry, apparel and toys are all at or near a one-year-high,” said the report. “While our survey suggests improvement in Canadian consumer confidence, spending intentions are still in a pattern of contraction with 52 per cent of respondents being likely or very likely to reduce their discretionary spending over the next 12 months. Despite that, these results piqued our curiosity and suggest investors should start to think about how to position their portfolio under a scenario where Canadian consumer confidence returns to an expansionary mode. Our survey results are positive for Sleep Country, Dollarama, Aritzia, Gildan, Pet Valu, KITS, BRP, and Spin Master. “In our view, the results paint an accurate picture of the state of the Canadian consumer and historically the results have been generally a good indication of upcoming financial performance of our companies under coverage.” 'Signs of demand recovery within the mattress industry continues. The demand environment for mattresses in Canada has been challenging for the past two-plus years. However, our survey results suggest that the outlook is improving with spending intentions up for two consecutive quarters, and with July 2024 showing the strongest spending intentions since March 2022. Hence, we could see a scenario for a rapid pickup in demand as the economic environment improves;' @glider3834 That is great info. Canada had a housing bubble. And because of how our mortgage market is structured, much higher interest rates have had a big impact on those with a mortgage, especially those with a large mortgage. But only about 20% of mortgages ‘reset’ / are affected each year… so it has taken time for higher rates to bite. My guess is for mortgage holders things will get worse over the next 12-18 months. Our mortgage market looks like it was structured like the US back in 2004-2006 with all those adjustable rate mortgages… the shit didn't hit the fan in the US until enough of the resets happened - and that took much longer than people thought (the ponzi scheme was up at that point). Canada won’t be hit as hard as the US because you can’t walk away from your mortgage here - and we don’t have a bankruptcy culture. People will do anything they can yo hang on to their property here - including stopping spending on pretty much everything else. The Canadian economy has been driven by the housing bubble over the past 7 years or so. New building starts have cratered. But lots of existing projects have to be completed - so the impact of higher rates has been slow to hit construction (but it is coming - if rates remain at current levels). Immigration / international students / temporary foreign workers has been adding 1 million new Canadians each year for the past couple of years - that should be a tailwind to GDP growth. But GDP per capital is the same today as it was back in 2017. And there is growing demands for the government to return to historical levels of new Canadians (total of about 400,000 per year). If they do that it will be contractionary as the numbers of some groups could go negative year over year - as people get kicked out of the country. My read is the economy in Canada is sick. We just might remain at stall speed for a few years. I really have no idea. The rub is the Bank of Canada. They have now dropped rates twice. This might be where the improving consumer confidence is coming from. They are going to keep dropping interest rates as fast as they can. If they are able to cut 100 or 150 basis points and the 5-year fixed mortgage rate drops below 4% - perhaps as low as 3.5% - later this year or early next year, our real estate market could really take off again. And that would drive a bunch of other things (wealth effect etc). That is the bull case for Sleep Country. The Bank of Canada has an inflation target of 2 to 3% and i think they want to run it as close to 3% as possible. Canada has too much consumer debt and the elegant way to solve that is to run elevated inflation for 5+ years (we are 3 years in). The problem with this approach is if inflation runs too hot again - gets back north of 4% or more - well people will see what they are doing and their credibility would be shot. Bottom line, I am not optimistic or pessimistic. My guess is Canada muddles through. Edited July 25, 2024 by Viking
glider3834 Posted July 25, 2024 Posted July 25, 2024 5 hours ago, Viking said: @glider3834 That is great info. Canada had a housing bubble. And because of how our mortgage market is structured, much higher interest rates have had a big impact on those with a mortgage, especially those with a large mortgage. But only about 20% of mortgages ‘reset’ / are affected each year… so it has taken time for higher rates to bite. My guess is for mortgage holders things will get worse over the next 12-18 months. Our mortgage market looks like it was structured like the US back in 2004-2006 with all those adjustable rate mortgages… the shit didn't hit the fan in the US until enough of the resets happened - and that took much longer than people thought (the ponzi scheme was up at that point). Canada won’t be hit as hard as the US because you can’t walk away from your mortgage here - and we don’t have a bankruptcy culture. People will do anything they can yo hang on to their property here - including stopping spending on pretty much everything else. The Canadian economy has been driven by the housing bubble over the past 7 years or so. New building starts have cratered. But lots of existing projects have to be completed - so the impact of higher rates has been slow to hit construction (but it is coming - if rates remain at current levels). Immigration / international students / temporary foreign workers has been adding 1 million new Canadians each year for the past couple of years - that should be a tailwind to GDP growth. But GDP per capital is the same today as it was back in 2017. And there is growing demands for the government to return to historical levels of new Canadians (total of about 400,000 per year). If they do that it will be contractionary as the numbers of some groups could go negative year over year - as people get kicked out of the country. My read is the economy in Canada is sick. We just might remain at stall speed for a few years. I really have no idea. The rub is the Bank of Canada. They have now dropped rates twice. This might be where the improving consumer confidence is coming from. They are going to keep dropping interest rates as fast as they can. If they are able to cut 100 or 150 basis points and the 5-year fixed mortgage rate drops below 4% - perhaps as low as 3.5% - later this year or early next year, our real estate market could really take off again. And that would drive a bunch of other things (wealth effect etc). That is the bull case for Sleep Country. The Bank of Canada has an inflation target of 2 to 3% and i think they want to run it as close to 3% as possible. Canada has too much consumer debt and the elegant way to solve that is to run elevated inflation for 5+ years (we are 3 years in). The problem with this approach is if inflation runs too hot again - gets back north of 4% or more - well people will see what they are doing and their credibility would be shot. Bottom line, I am not optimistic or pessimistic. My guess is Canada muddles through.
gfp Posted July 25, 2024 Posted July 25, 2024 (edited) 1 hour ago, Junior R said: any reason why this is down today? Who knows... But it is important to remember that not everybody is like the nerds on this message board going through the 7 stages all the way to acceptance on the decision to buy a mattress retailer in a matter of hours. Some folks only hear about the mattress retailer a bit later and are slower to progress through the stages... (also Eurobank looked like it was breaking out and reversed lower instead. But the bull steepening in government bonds ought to be a big plus for 'em) Edited July 25, 2024 by gfp
FiveSigma Posted July 25, 2024 Posted July 25, 2024 Has anyone looked into estimating Sleep Country sustainable owners earnings. They have ~$63M in depreciation expense per year, but invest only ~$15-20M in capex. Are they underinvesting in the business or is sustainable maintenance capex much lower than depreciation?
Crip1 Posted July 25, 2024 Posted July 25, 2024 (edited) 1 hour ago, Junior R said: any reason why this is down today? Sure speculation: This actually reminds me of years past when, after a good quarterly earnings release, the share price would move higher 3-4 days later…it was like clockwork. This fits the modality of a thinly followed stock where there are not immediate responses in the market like one would see with a highly followed stock. Almost like “Hey…look what happened a couple days ago…” and, if that’s the case, the fringe market watchers may not see the benefit of the Sleep Country transaction. -Crip P. S. Also worthy of note is that the volume on the US OTC market is 600 shares as of 1:00 Central time, about 12% of the average daily volume of 4,000+. Edited July 25, 2024 by Crip1
Hoodlum Posted July 25, 2024 Posted July 25, 2024 (edited) 1 hour ago, Junior R said: any reason why this is down today? Likely thin volume before the Q2 results. Also, have we entered the reporting quiet period? If so Fairfax would not be buying now as well. Edited July 25, 2024 by Hoodlum
Munger_Disciple Posted July 25, 2024 Posted July 25, 2024 (edited) 1 hour ago, gfp said: Who knows... But it is important to remember that not everybody is like the nerds on this message board going through the 7 stages all the way to acceptance on the decision to buy a mattress retailer in a matter of hours. Some folks only hear about the mattress retailer a bit later and are slower to progress through the stages... (also Eurobank looked like it was breaking out and reversed lower instead. But the bull steepening in government bonds ought to be a big plus for 'em) Yeah even some members of this board don't think a mattress retailer reminds them of See's Candies. If it turns out to be 1/2 as good as NFM, I would be happy. Edited July 25, 2024 by Munger_Disciple
Luke Posted July 25, 2024 Posted July 25, 2024 (edited) Again, is anybody here happy with this acquisition? Do you think this is a good allocation of 1b USD of cash in the current opportunity field? Edited July 25, 2024 by Luke
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