Fairfax 2024

[glider3834]

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. 

[Junior R]

any reason why this is down today?

[gfp]

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]

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]

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]

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]

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]

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

[Munger_Disciple]

11 minutes ago, Luke said:

Again, is anybody here happy with this acquisition? Do you think this is a good allocation of almost 1b USD of cash in the current opportunity field? 

 

The silence is deafening.....

[UK]

21 minutes ago, Luke said:

Again, is anybody here happy with this acquisition? Do you think this is a good allocation of almost 1b USD of cash in the current opportunity field? 

 

I am not sure about it, but also do not see it as necessarilly bad. The probability is also very high they did far more homework on it, than most of us:). In any case, isnt it like 3-4 per cent from their CAP?

 

Edited July 25, 2024 by UK

[Luke]

Paid 1.2b USD for this:

700m USD revenue ( up from 340m since 2014)

50m USD in earnings (4% yield) They had better years with less selling+admin costs at 70m USD earnings

Share dilution from 20m-34m shares outstanding (acquisition? no real growth after adjusting for issued shares?) 

Margins sort of flattish looking at net income

 

So basically a business that will grow earnings very slowly with population growth if they manage to build enough housing so trend wont revert? (skeptical)

 

 

 

 

 

[Luke]

So I currently also see a LVMH at 5% earnings yield which will grow more and better than local mattress shop?

 

Even a Hermes at 2% looks more attractive than mattress at 4%? 

 

Then commodity companies in US, Oil, Coal? 

 

Our beloved value stocks on the board here? 

 

Heck even berkshire looks better than this? 

 

Heck even the Index looks better? 

 

What does our grandmaster of Fairfax think about this @Viking? 

 

Cheers folks!  

[sleepydragon]

25 minutes ago, Luke said:

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? 

I have never heard of about this mattress company bacause it’s Canada. But in United state I don’t know any mattress company that has a strong moat and consistently sustain high profit margins

[Luke]

I mean, it's not like Fairfax only buys shitters but this acquisition stinks to me. Either I am ignorant and not able to see the attractiveness of price paid+valuation, or possible upside with Fairfax involvement? But there are many more things id like to buy at 4% earnings yield that are arguably a lot higher quality than Sleep Country and 1.2b is really quite a significant amount of cash. We need a lot better for multiple expansion and "100b market cap by 2034"...

 

Not a seller of Fairfax at current prices but if they do 3 more of acquisitions like this and shoot out 1.5 years of their cashflow then ill consider trimming my very overweight position...

[Luke]

Just buy something like LVMH, Tencent, Nintendo...much better, higher yields even, much higher quality management...id understand the acquisition if yield would be 10-15% but 4% yield? Maybe selling/admin goes down and they can push it up to 6-7% yield, would feel quite better with that...maybe? 

 

Happy if anybody can change my mind on this/sees what the handsomely paid investment team sees vs me, a retail investor nerd

[Santayana]

8 minutes ago, Luke said:

So I currently also see a LVMH at 5% earnings yield which will grow more and better than local mattress shop?

 

I don't think they're in a position to take LVMH private. I understand your point, but you can't compare the situation of having full control of a company to what's available by just buying stock.

[Luke]

2 minutes ago, Santayana said:

I don't think they're in a position to take LVMH private. I understand your point, but you can't compare the situation of having full control of a company to what's available by just buying stock.

I am not saying they should take LVMH private. But they can buy 1.2b worth of shares yielding 60m a year and probably will yield at least 120-150m in a decade. What will sleep Canada do in that time? 40% return? Someone with an MBA sitting at Fairfax earnings a couple 100k should do better no?

Edited July 25, 2024 by Luke

[Luke]

So if they see that there is a lot juice left to squeeze at the mattress dealer that gets us to 7-8% yield with some expansion and margin improvement, maybe this isn't AS bad? Still looks expensive and quite some work/gambling...

 

Would make a good opportunity to ask a question on this buy next earnings call if anybody here has the time with their fund! 

Edited July 25, 2024 by Luke

[gfp]

25 minutes ago, Luke said:

Paid 1.2b USD for this

 

How do you figure they are paying $1.2 Billion USD for this?

[Luke]

3 minutes ago, gfp said:

 

How do you figure they are paying $1.2 Billion USD for this?

Is my currency conversion wrong? 1.7b CAD to USD->1.2b? 

 

https://www.reuters.com/markets/deals/fairfax-buy-retailer-sleep-country-124-bln-deal-2024-07-22/

 

Fairfax to buy retailer Sleep Country in $1.24 bln deal

 

Or am I unware of something else? Please let me know. 

Edited July 25, 2024 by Luke

[gfp]

4 minutes ago, Luke said:

Is my currency conversion wrong? 1.7b CAD to USD->1.2b? 

 

https://www.reuters.com/markets/deals/fairfax-buy-retailer-sleep-country-124-bln-deal-2024-07-22/

 

Fairfax to buy retailer Sleep Country in $1.24 bln deal

 

Or am I unware of something else? Please let me know. 

 

That is an enterprise value with assumed debt and lease liabilities.  Fairfax is paying $35 CAD per share for 35 million shares so 100% of the equity is around $890m USD.  If you are going to use enterprise value, I would use something other than reported net income to see if it is expensive or not.

[Luke]

10 minutes ago, gfp said:

 

That is an enterprise value with assumed debt and lease liabilities.  Fairfax is paying $35 CAD per share for 35 million shares so 100% of the equity is around $890m USD.  If you are going to use enterprise value, I would use something other than reported net income to see if it is expensive or not.

You are right, it's late here, 356 in debt, 900m equity->debt gone->8% yield. 

 

Still, what's great here? A stable core business that will grow small forever? Debt also isn't vaporizing, has to be paid off, reducing IRR etc?  

Edited July 25, 2024 by Luke

[Hoodlum]

I see that Scotiabank increased their target from $1950 to $2000 cdn yesterday.  Does anyone have access to that report as they may have commented on this acquisition.

Edited July 25, 2024 by Hoodlum

[Junior R]

Does Sleep country own any land or warehouses or are they leased maybe thats the play for ffh not sure but if I remeber correctly with toys r us they kept the real estate and sold the business 

[Thrifty3000]

1 hour ago, Luke said:

So basically a business that will grow earnings very slowly with population growth if they manage to build enough housing so trend wont revert? (skeptical)

Growth doesn’t just come from new housing starts. With 39 million people comes about 39 million mattresses, of which, about 3 million of them have to be replaced every year. Sleep Country currently sells about one out of every three mattresses purchased in Canada.

 

That means they have opportunity to triple their domestic market share before even having to worry about selling mattresses to the world’s 8 billion other sleepers.

 

Over the last 10 years they have not only grown store count, but they have also grown via acquisition - acquiring competitors as well as companies with complimentary product lines, like fancy pillows and fancy weighted blankets.

 

Being the largest scale provider in Canada that’s also owned by a large financial backer will provide important competitive advantages. They will now be able to ramp up new stores, acquisitions and marketing at whatever pace they can justify to Fairfax (and these factors were well scrutinized by FFH during negotiations and diligence.) I suspect the base case expectation is to grow the value by 15% annually over at least the next decade, or the investment committee would have black-balled it.

 

Notice some of the main reasons Sleep Country’s profit declined year over year:

 

- acquisition/integration related expenses (hopefully to offer better value proposition)

 

- increased marketing/advertising spend (hopefully to increase sales)

 

- increased compensation (hopefully to attract/retain better talent)

 

^ those will either positively impact future results, or be reversed if results fail to materialized. I don’t have a problem with them sacrificing some current yield to more aggressively invest in growth.

 

Some other nice things to consider:

 

- in recent years the medical community has been emphasizing more and more the importance of sleep. Sleep is now one of the core pillars of health alongside diet, exercise and stress. If you look at Sleep Country’s mission statement it appears they are positioning the company as an expert sleep solutions service rather than just a mattress retailer. I think it’s a brilliant move that will become a key differentiator if they continue to stick to that promise. (I think sleep solutions providers will enjoy a multi-year tailwind of increasing wallet share as more people recognize the importance of high quality sleep. Who knows, maybe there will be a line of Sleep Country CPAP machines soon. Haha)
 

- I assume several hundred million mattresses are sold annually worldwide. If Sleep Country currently sells a million or so a year, then they have PLENTY of room to run with the right long term financial partner. What if they captured 30% of global market share? Now we’re talkin!

 

Needless to say, I’m happy with the prospects of this one and look forward to seeing what they can do with it long term. I expect it will outperform treasuries, I’m hopeful it will compound by double digits for the foreseeable future, and I’ll be delighted if it does any better than that.

Edited July 25, 2024 by Thrifty3000