Fairfax 2024

[glider3834]

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]

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]

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]

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]

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 by gfp

[glider3834]

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 by glider3834

[Viking]

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 by Viking

[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 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 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 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 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 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 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 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 by Luke