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questions about fairfax


matjone
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I have a couple of questions about fairfax, which are probably dumb ones but unfortunately that's the only kind I'm qualified to ask.

 

What is the price to book ratio?  From the statement on SEDAR I'm coming up with 7761.9M equity divided by 20.436M shrsout gives me $379.82 equity per share, and price is quoted at around $350-$360 on yahoo, which comes out to around 92% to 95% of book value depending on whether I use the price for the OTC or the TSX shares.  The only reason I am doubting it is that morningstar has the price to book listed at 2.8 for the OTC shares which I am pretty sure is wrong.

 

What is the difference between the OTC shares and the ones traded on the TSX?  The price quote on yahoo for FFH.TO is $351.47, and the one for FRFHF.PK is $361.11.  Is there any difference between the two other than how/where they are traded?  The OTC shares have the same ownership claim with the same voting rights, correct?

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The FFH.TO quote is in Canadian dollars on the TSX.  The FRFHF.PK quote is the U.S. dollar quote through the OTC board.  You were correct in calculating the book value from the financials, but then compare it to the OTC board price...so it is an apples to apples or US$ to US$ comparison.

 

Don't worry there are no dumb questions.  Only dumb mistakes when people don't ask enough questions!  ;D  Cheers!

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Another question....

 

I noticed in the year-end letter that "net gains on investments" are included in Fairfax's calculation of interest coverage.  I'm not sure if "net gains" are realized or unrealized (or both; I unsuccessfully tried to pencil it out), but without including gains, the company didn't cover interest expense (and certainly not interest expense plus the preferred dividend).

 

So - should I be concerned?  If the expectation is that gains occur on a consistent basis and can make up the op inc shortfall, I find that mind set a bit troubling.  On the other hand, I don't think FFH would have problems accessing either the debt or equity market, if needed.

 

Any insight is greatly appreciated!

 

PS:  I normally don't use !s, but after reading Mr. Watsa's letter, I decided I need to use them more often!

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No, that statistic will change from quarter to quarter, year to year.  If it was prolonged, then that would eat into FFH capital, but that is there to give you some understanding of the year's operations.

 

The main concern is if there is enough interest and dividend income to cover interest costs and corporate expenses.  The idea is that if all those other lines are normally break-even, will the company continue to cover interest and general corporate costs?  Yes.  Over time, you will have underwriting gains and losses, as well as investment gains and losses, and fluctuations in the other line items such as runoff.

 

Always measure any investments operations over a period of time...5 years.  Make the estimate of intrinsic value based on what is currently happening, but you can't ignore the general operation of the business over longer periods.  Cheers!

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