Fairfax 2024

[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

[Luke]

9 minutes ago, Thrifty3000 said:

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.

Thank you for the thought out and detailed reply, highly appreciated. 

[Parsad]

1 hour ago, Munger_Disciple said:

 

The silence is deafening.....

 

It was a good acquisition, but they paid fair value.  

 

For years, shareholders have been complaining about them paying too little for turnarounds and lesser quality companies, and then living with the consequences when they don't do that well. 

 

Now when they pay fair value for a good company, the bitching starts all over again on why they paid so much.  You're damned if you do, and damned if you don't.

 

Cheers!

[Munger_Disciple]

14 minutes ago, Parsad said:

 

It was a good acquisition, but they paid fair value.  

 

For years, shareholders have been complaining about them paying too little for turnarounds and lesser quality companies, and then living with the consequences when they don't do that well. 

 

Now when they pay fair value for a good company, the bitching starts all over again on why they paid so much.  You're damned if you do, and damned if you don't.

 

Cheers!

 

I don't think people have an issue with Fairfax acquiring good companies at fair prices like Berkshire does. Just seems (at least on the surface) this is a so so business with no obvious moat. And that's causing some understandable "heartburn". All the more so when the stock is trading at what seems like a decent discount to intrinsic value so they could just do a buyback with the capital as an alternative. 

Edited July 25, 2024 by Munger_Disciple

[Parsad]

1 minute ago, Munger_Disciple said:

 

I don't think people have an issue with Fairfax acquiring good companies at fair prices like Berkshire does. Just seems (at least in the surface) this is a so so business. And that's causing some understandable "heartburn". 

 

It's actually quite a good, durable business, making money on a consistent basis...which is something we don't see Fairfax invest in all of the time. 

 

Would I have been happier if they just put the money into a few undervalued public securities in the U.S.?  Probably.

 

I can see them growing this for a few years and then selling it to someone like Leon's for twice its current value when the economy and consumer spending normalize.

 

Unlike Berkshire, not all of Fairfax's positions are permanent.  They are more opportunistic and their strength lies in insurance and buying/selling assets.

 

Cheers!

[TwoCitiesCapital]

2 hours 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'm indifferent to it - though I've not looked into it in depth

 

At this point - unless if its obviously lighting money on fire - I trust the management. People complained about Stelco too - Fairfax made out like bandits on that one. 

 

1 hour ago, sleepydragon said:

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

 

Other than Eurobank with its oligopoly that was bought on its way to bankruptcy - what Fairfax investments have "moats"? Fairfax is a classic value investor. Not a "buy and never sell" like Berkshire where the moat would be more important. 

Edited July 25, 2024 by TwoCitiesCapital

[Munger_Disciple]

23 minutes ago, Parsad said:

 

It's actually quite a good, durable business, making money on a consistent basis...which is something we don't see Fairfax invest in all of the time. 

 

Would I have been happier if they just put the money into a few undervalued public securities in the U.S.?  Probably.

 

I hope you are right @Parsad! As someone else said, we in the US can't think of a mattress retailer with a moat. May be Canada is a different beast? (they sleep more in the winter? Just kidding )

Edited July 25, 2024 by Munger_Disciple

[cwericb]

 

Really? Does anyone really think that the team at Fairfax just woke up really stupid the other day and decided to invest in some awful company?

 

Might one suspect the team at Fairfax just might know a whole lot more than I (and probably every other person on this board) about the companies in which they decide to invest and their future plans for that investment?

 

Remember that stupid pet insurance investment? And any idiot could see that getting involved in the terrible steel industry was going to be a disaster.

 

Perhaps this seems a bit odd on the surface, but these guys just didn't suddenly get stupid.

So personally, I just kinda trust Fairfax to know what they are doing.

Edited July 25, 2024 by cwericb

[Parsad]

Just now, Munger_Disciple said:

 

I hope you are right @Parsad! As someone else said, we in the US and can't think of a mattress retailer with a moat. May be Canada is a different beast? (they sleep more in the winter? Just kidding )

 

Sleep Country USA was acquired by Sleep Train almost 20 years ago...both owned by Mattress Firm which played with bankruptcy in 2018...so the markets as similar as they may seem, are quite different. 

 

Sleep Country Canada didn't grow as rapidly as Mattress Firm and has been managed by Christine McGee for almost 25 years.  She's done a great job of building the company.  It's a very well known brand/company in Canada and everyone knows the jingle...which was shared by Sleep Country USA. 

 

So a similar business model, but completely different results over the long-term! 

 

In regards to sleeping more...I certainly do, but I can't speak for everyone else!    Cheers!