Q2 Earnings Discussion

[Thrifty3000]

7 hours ago, Viking said:

Effective shares outstanding reduced by more than 800,000 in 6 months? WTF? Love it. I need to better understand the impact of buying back stock at a slight premium to book value.

For anyone that may not know how buybacks are accounted for on the balance sheet…

When a company buys back its own shares, or repurchases shares, it impacts its balance sheet in a couple ways: 

• Cash 
  The company's cash balance decreases by the amount spent on the buyback, which is reflected on the balance sheet as a reduction in cash holdings and total assets.
• Shareholders' equity 
  The company's shareholders' equity decreases by the same amount as the cash reduction, which is reflected on the liabilities side of the balance sheet. This is because the treasury stock account, which is used to record the transaction, is a contra-equity account that reduces shareholders' equity.

The accounting entry for a share repurchase is as follows: 

• Debit: Treasury stock for the amount paid to reacquire the shares 
• Credit: Cash for the amount paid to buy back the shares

For example, if a company buys back 10,000 of its own shares for $15 per share, the entry would be:

• Debit: Treasury stock: $150,000 
• Credit: Cash: $150,000

 

^ Once a company buys back meaningful amounts of shares, like Fairfax, then per share metrics, like EPS, become more important, and book value metrics, like ROE, start getting distorted (especially if shareholders equity turns negative).

 

Investors that have conditioned themselves to focus on book value growth - thanks to Buffett’s and Prem’s historical emphasis on BV - rather than EPS, will think FFH is underperforming.

 

As long as FFH is buying back below intrinsic value then it should have a VERY positive impact on EPS growth.

[Thrifty3000]

Even if a company’s earnings don’t grow, if:

 

- they buy back 10% of their shares then EPS will grow by 11%
 

- they buy back 33% of their shares then EPS will grow by 50%!

 

Now, the real magic happens when a company’s earnings are growing AND the company is buying back at a low multiple to those earnings.

 

At FFH’s current rates we’ll be looking at $200 normalized EPS in no time.

[Junior R]

stock taking a dive lol...not sure why its down on good earnings ...added more

[Daphne]

DJ is down close to 1k points

[Hoodlum]

Fairfax will be out of blackout early next week.  A great opportunity for buy backs.  

[cwericb]

Share price down $150 in 2 days. Good thing we had a decent quarter.

 

Not the first time Fairfax released good results on a crappy market day.

Sucks. Oh well who knows where the bottom is in this market.

Be embarrassing if Brett Horne and Carson Block turn out to be - never mind, lets not go there.

[Malmqky]

11 minutes ago, cwericb said:

Share price down $150 in 2 days. Good thing we had a decent quarter.

 

Not the first time Fairfax released good results on a crappy market day.

Sucks. Oh well who knows where the bottom is in this market.

Be embarrassing if Brett Horne and Carson Block turn out to be - never mind, lets not go there.

 

I can see it now...

 

Market is down 30%, Fairfax is down 20%.

 

Carson Block: "See, I told you!!!!!"

[TwoCitiesCapital]

14 minutes ago, Malmqky said:

 

I can see it now...

 

Market is down 30%, Fairfax is down 20%.

 

Carson Block: "See, I told you!!!!!"

 

 

Probably how it would work. 

 

In other news, Fairfax probably made a quarter billion, or more, on their bonds today and the stock is down 5%. Basically completely undoes the unrealized loss from Q1 while adding $100 million to their coffeers - but today isn't the only day interest rates have fallen, nor will it be the last. 

 

[hardcorevalue]

I think the fear is not this quarter’s earnings but what happens in 3 years when their bonds mature.

 

I don’t think we go back to 0 or 2% rates but that’s the bear case.  

Edited August 2 by hardcorevalue

[Malmqky]

22 minutes ago, hardcorevalue said:

I think the fear is not this quarter’s earnings but what happens in 3 years when their bonds mature.

 

I don’t think we go back to 0 or 2% rates but that’s the bear case.  

I don’t think the market is looking out 3 years. I think maybe the approaching hurricane season and certainly general market conditions are the reason for today’s drop/fear

[Viking]

38 minutes ago, hardcorevalue said:

I think the fear is not this quarter’s earnings but what happens in 3 years when their bonds mature.

 

I don’t think we go back to 0 or 2% rates but that’s the bear case.  

 

I hope the stock is selling off today because people are concerned about Fairfax's earnings in 2026 or 2027. 

 

Do people seriously think we are returning to a zero interest rate world? We might be. But I doubt it.

 

Perhaps we get a growth slow down over the next year. And that causes global central banks to drop interest rates over the next year. But low rates will stoke economic growth. And I think secular forces are still inflationary:

- very high government (deficit) spending

- deglobalization

- energy transition

- geopolitical uncertainty / wars

 

So my guess is we get a big head fake over the next year. Where people think inflation is licked. Rates go low and animal spirits kick in with a vengeance again. Only to re-kindle inflation. It might take 18 to 24 months to play out. 

 

What does this mean for Fairfax? We know they are locked and loaded for the next 2 or 3 years. After that? Who the hell knows? Good luck trying to invest today based on where you think interest rates might be in 3 years and what Fairfax will have done in the interim period.

 

As investors, we typically want predictability and 'stability.' What I do know is volatility is usually very good for Fairfax. It provides them with great opportunity - and their execution in recent years has been stellar. It is very counter intuitive.

 

Fairfax has a very unorthodox style / way of doing things. Mr. Market will find something they don't like (doesn't have to look hard with Fairfax.) It results in lots of volatility in the share price. If the share price stays low Fairfax will have the opportunity to take out a meaningful number of shares at a low valuation. And Fairfax has the cash. That is a wonderful set-up for long term shareholders.

 

In the past, when Fairfax's shares sold off the company did not have the free cash flow to take out a meaningful number of shares. That is no longer the case. They are swimming in cash and they don't have a good alternative use for it.

Edited August 2 by Viking

[value_hunter]

12 minutes ago, Malmqky said:

I don’t think the market is looking out 3 years. I think maybe the approaching hurricane season and certainly general market conditions are the reason for today’s drop/fear

But why the other PC insurer, like MKL, WRB, CB don't drop that much? IFC even goes up.

[UK]

Strange price action for FFH today.

 

Rate expectations (would be my guess) or not, this should also influence all insurers/reinsurers, but I do not see many (or at all) other insurance stocks down more then 5 percent? 

 

Was something bad said in the call?

 

 

[UK]

7 minutes ago, value_hunter said:

But why the other PC insurer, like MKL, WRB, CB don't drop that much? IFC even goes up.

 

+1

[Viking]

7 minutes ago, UK said:

Strange price action for FFH today.

 

Rate expectations (would be my guess) or not, this should also influence all insurers/reinsurers, but I do not see many (or at all) other insurance stocks down more then 5 percent? 

 

Was something bad said in the call?

 

This is Fairfax. We have been spoiled the past 18 months - that price action (pretty much straight up) is not normal. My guess is perhaps the stock is simply trading more along normal / volatile lines.  

[UK]

20 minutes ago, Viking said:

 

This is Fairfax. We have been spoiled the past 18 months - that price action (pretty much straight up) is not normal. My guess is perhaps the stock is simply trading more along normal / volatile lines.  

 

Thanks. OK then. Still was perplexed by this a little, even went to check if maybe there is something new from MW:)

[Junior R]

Scotia Top plays

[Masterofnone]

My guess on the price action is it is an attempt to exit an existing short position through additional shorting during a period when the company can not repurchase shares. There are investors who know what they own and why.  But there are investors who act on headlines and never look at the details of an earnings report. Price action is their cue. "Oh man the price is plummeting, earnings must have sucked!", and they sell their shares. If the past in these sort of situations is any guide, it will open lower Monday and be back to 52 week highs within a month.

[Malmqky]

1 minute ago, Junior R said:

Scotia Top plays

 

It's refreshing to see a price target that's not 10% higher or lower than current price and actually has some kind of multiple slapped on, even if crude. I remember when Facebook dropped from $330 to $80 and certain bullish analyst price targets went something like $350>$300>$250>$200...all the way down to $100. 

[Hoodlum]

11 minutes ago, Masterofnone said:

My guess on the price action is it is an attempt to exit an existing short position through additional shorting during a period when the company can not repurchase shares. There are investors who know what they own and why.  But there are investors who act on headlines and never look at the details of an earnings report. Price action is their cue. "Oh man the price is plummeting, earnings must have sucked!", and they sell their shares. If the past in these sort of situations is any guide, it will open lower Monday and be back to 52 week highs within a month.

We will need to wait until Tues for FFH action, as Monday is a holiday in Canada.  Market volatility should settle by then and Fairfax will be buying back shares on Tuesday. 

[Thrifty3000]

In terms of the cause of today's volatility, if the simplest answer is the most likely one, then I'd say today's surprise economic data increasing likelihood of a .5% rate cut in September is the main culprit.

 

However, it's important to remember that if buying treasuries yielding more than 4% was phase 1 of FFH's ideal portfolio repositioning effort, then, according to Prem, the next phase of unreal performance will happen when recession fears cause high grade corporate bond yield spreads to blow out - so FFH can pick up yields over 6%, at which point heretofore unimaginable amounts of cash will rain down on FFH.

 

Volatility like what we're seeing today is our absolute best friend.

[Masterofnone]

31 minutes ago, Hoodlum said:

We will need to wait until Tues for FFH action, as Monday is a holiday in Canada.  Market volatility should settle by then and Fairfax will be buying back shares on Tuesday. 

Thanks. In this case,I would not at all be surprised if we see another 5% reduction on Monday. I'll be looking to add shares a couple of hours after market open in the silly amusement of trying to be precisely right. We'll see how cloudy is my personal crystal ball....

[netcash1]

Can someone figure out now what Fairfax's ownership % is in Go Digit?  49% plus the Prefs?

Thank you

[nwoodman]

Conference call notes.  Transcript attached

 

Financial Performance and Outlook

Peter Clarke highlighted sustainable operating income: "For the first time in our 38-year history, we can say to you we expect, of course, no guarantees sustainable operating income of $4 billion."

 

Investment Portfolio and Strategy

Wade Burton provided insights on the portfolio structure: "The investment portfolio stands at $66 billion at the end of the quarter, $37 billion is in fixed income, including USD 18 billion in Canadian treasuries and another $4.9 billion in mortgages. In addition, we have approximately $9 billion in cash and short-term investments, duration is 2.7 years, including cash and the yield is 5.1%."

 

WB on current market conditions:"The high prices of stock markets means opportunities are not pouring our way in marketable securities. And the small size of this part of our portfolio reflects that. Our team continues to screen through stock markets worldwide, looking for value, which will no doubt emerge. But in the meantime, our private and strategic investments provide excellent earnings and our fixed income portfolio continues to produce strong interest income with rates well above 4%."

 

Hidden Book Value

Clarke highlighted unrealized gains not reflected in the book value: "As mentioned in previous quarters, our book value per share of $980 does not include unrealized gains or losses in our associate investments and our consolidated investments, which are not mark-to-market. At the end of the second quarter, the fair value of these securities is in excess of carrying value by $1.5 billion, an unrealized gain position or $68 per share on a pretax basis."

 

Key Investments Performance

Eurobank:

Burton noted: "We're expecting well over $1.2 billion in net income in 2024. The balance sheet has never been stronger with Basel III fully loaded core Tier 1 of 16.2%." He added, "The bank has also paid its first dividend in more than 16 years, a EUR 0.09 per share dividend, which resulted in a $128 million dividend payment to Fairfax."

 

Poseidon:

Burton highlighted: "Poseidon owns 184 cargo ships, all with long-term contracts and with the average life of the contracts around 9 years... It's amazing looking back in 2019, Poseidon made $0.80 a share in net income. This year, it's on track to making $1.60, a double, a fantastic performance."

 

Risk Management and Recent Events

Peter Clarke addressed analyst concerns: "Very little impact we expect from those two events. Beryl, especially, we don't see -- it's more of an attritional cat loss for us we expect in the third quarter."

 

Casualty Reserving

Clarke reassured: "Our companies have done a wonderful job managing the cycle, writing much less business during that period and then expanding in the hard market years, 2000 and onwards. So of our $34 billion net reserves, about 80% are in these hard market years."

 

Growth Outlook

Clarke explained: "Growth has slowed down in the first 6 months of 2024. I think on a gross basis, we're up about 1% on a net basis, 3%. That of course, excludes the Gulf acquisition."

 

Gulf Insurance Outlook

Clarke provided insight: "We've been invested in Gulf for the better part of 12 years. And if you look over that time period, they produce consistently combined ratio below 95%, I think, on average, about 94%. So that -- we'd expect it would run at that rate going forward and in the future."

 

Capital Allocation and Share Buybacks

Clarke confirmed: "Our companies grew almost 16% per year over the last -- since 2019, and we supported that growth through capital generation of the insurance companies. Now with that premium leveling off last year and this year, it's producing excess capital and strong dividends to Fairfax.And we've been using that to buy our shares. We think they're at great prices, and we'll continue to do that going forward”

 

Jen Allen: "So Jaeme, we did receive additional dividends in the quarter. On a YTD basis, we do provide disclosure in our MD&A under the liquidity section. So I'll refer you to that for the additional dividends that were received."

 

Acquisitions

Regarding the Sleep Country acquisition, Clarke stated: "We think Sleep Country will be a great investment over the long term and are very happy that their talented team led by Stewart Schaefer, will join the Fairfax Group."

 

FRFHF Q2 24- Transcriptt.pdf

Edited August 3 by nwoodman

[UK]

26 minutes ago, nwoodman said:

Conference call notes.  Transcript attached

 

Financial Performance and Outlook

Peter Clarke highlighted sustainable operating income: "For the first time in our 38-year history, we can say to you we expect, of course, no guarantees sustainable operating income of $4 billion."

 

Investment Portfolio and Strategy

Wade Burton provided insights on the portfolio structure: "The investment portfolio stands at $66 billion at the end of the quarter, $37 billion is in fixed income, including USD 18 billion in Canadian treasuries and another $4.9 billion in mortgages. In addition, we have approximately $9 billion in cash and short-term investments, duration is 2.7 years, including cash and the yield is 5.1%."

 

WB on current market conditions:"The high prices of stock markets means opportunities are not pouring our way in marketable securities. And the small size of this part of our portfolio reflects that. Our team continues to screen through stock markets worldwide, looking for value, which will no doubt emerge. But in the meantime, our private and strategic investments provide excellent earnings and our fixed income portfolio continues to produce strong interest income with rates well above 4%."

 

Hidden Book Value

Clarke highlighted unrealized gains not reflected in the book value: "As mentioned in previous quarters, our book value per share of $980 does not include unrealized gains or losses in our associate investments and our consolidated investments, which are not mark-to-market. At the end of the second quarter, the fair value of these securities is in excess of carrying value by $1.5 billion, an unrealized gain position or $68 per share on a pretax basis."

 

Key Investments Performance

Eurobank:

Burton noted: "We're expecting well over $1.2 billion in net income in 2024. The balance sheet has never been stronger with Basel III fully loaded core Tier 1 of 16.2%." He added, "The bank has also paid its first dividend in more than 16 years, a EUR 0.09 per share dividend, which resulted in a $128 million dividend payment to Fairfax."

 

Poseidon:

Burton highlighted: "Poseidon owns 184 cargo ships, all with long-term contracts and with the average life of the contracts around 9 years... It's amazing looking back in 2019, Poseidon made $0.80 a share in net income. This year, it's on track to making $1.60, a double, a fantastic performance."

 

Risk Management and Recent Events

Peter Clarke addressed analyst concerns: "Very little impact we expect from those two events. Beryl, especially, we don't see -- it's more of an attritional cat loss for us we expect in the third quarter."

 

Casualty Reserving

Clarke reassured: "Our companies have done a wonderful job managing the cycle, writing much less business during that period and then expanding in the hard market years, 2000 and onwards. So of our $34 billion net reserves, about 80% are in these hard market years."

 

Growth Outlook

Clarke explained: "Growth has slowed down in the first 6 months of 2024. I think on a gross basis, we're up about 1% on a net basis, 3%. That of course, excludes the Gulf acquisition."

 

Gulf Insurance Outlook

Clarke provided insight: "We've been invested in Gulf for the better part of 12 years. And if you look over that time period, they produce consistently combined ratio below 95%, I think, on average, about 94%. So that -- we'd expect it would run at that rate going forward and in the future."

 

Capital Allocation and Share Buybacks

Clarke confirmed: "Our companies grew almost 16% per year over the last -- since 2019, and we supported that growth through capital generation of the insurance companies. Now with that premium leveling off last year and this year, it's producing excess capital and strong dividends to Fairfax.And we've been using that to buy our shares. We think they're at great prices, and we'll continue to do that going forward”

 

Jen Allen: "So Jaeme, we did receive additional dividends in the quarter. On a YTD basis, we do provide disclosure in our MD&A under the liquidity section. So I'll refer you to that for the additional dividends that were received."

 

Acquisitions

Regarding the Sleep Country acquisition, Clarke stated: "We think Sleep Country will be a great investment over the long term and are very happy that their talented team led by Stewart Schaefer, will join the Fairfax Group."

 

FRFHF Q2 24- Transcriptt.pdf 85.26 kB · 1 download

 

Thanks for posting!