Fairfax a strong buy?

[mcliu]

The $1 BV of BRK has a much better collection of underlying assets than the $1 BV of FFH.

[giofranchi]

The $1 BV of BRK has a much better collection of underlying assets than the $1 BV of FFH.

 

Of course, and I don’t argue with that. The fact is returns are related to quality, but they are not related to quality ONLY.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

[Partner24]

Let's put it simply. The numbers aren't exact, but it will simplify the rationale about BRK/FFH respective book values.

 

To me:

 

A dollar of BRK book is (slightly less) two birds in your hand that will hopefully give birth to 3 birds each over the next decade.

 

A dollar of FFH book is (slightly more) one bird in your hand that will hopefully give birth to 4 birds each over the next decade.

 

 

[Ross812]

I don't know how you compare Berkshire to Fairfax. Fairfax is an insurance company with a stock portfolio. At the helm is a smart value investor who loosely follows the Graham school of thought as it pertains to investing. Prem is currently running a hedge to preserve the value of the stock portfolio (aka book value) should deflation occur and the market tank. Berkshire is completely different. Berkshire is a diversified conglomerate which owns everything from insurance to ketchup and trains. At the helm of Berkshire is a smart value investor who does not follow the Graham school of thought but buys cash flows at a discount to their intrinsic value. Attempting to compare an 8 billion dollar insurance company to a 253 billion dollar conglomerate cannot be done. That is like trying to compare Coke to Jones Soda. 

 

The question is which company has a higher probability of compounding money at the market cap YOU purchased the company for over the next 10 years. This means assuming in 10 years you sold both companies at 1x BV  and Fairfax grows at 10% Berkshire must grow BV at a rate of 13% to overcome the more expensive price paid. The expression is: (1.3*Frfhf.GR^10=Brk.GR^10) Brk.GR >= 1.0265*Frfhf.GR to consider Brk over Frfhf.

 

What did buffet just do? Heinz Ketchup has a 6% essentially guaranteed Growth Rate. He bought HNZ at a P/E of 24. Lets say a fair P/E is 15, so he essentially bought HNZ at 24/15 or 1.6x current value (comparable to 1.6x BV). At a 6% growth rate, Heinz will get back to intrinsic 15x p/e after 8 years of growth (1.06^8=1.6). This implies that Buffet anticipates a 3.3% GR for Brk over the same time period all things being equal. (1.3*Hnz.GR^8=BRK.GR^8)

[racemize]

What did buffet just do? Heinz Ketchup has a 6% essentially guaranteed Growth Rate. He bought HNZ at a P/E of 24. Lets say a fair P/E is 15, so he essentially bought HNZ at 24/15 or 1.6x current value (comparable to 1.6x BV). At a 6% growth rate, Heinz will get back to intrinsic 15x p/e after 8 years of growth (1.06^8=1.6). This implies that Buffet anticipates a 3.3% GR for Brk over the same time period all things being equal. (1.3*Hnz.GR^8=BRK.GR^8)

 

I think his deal works out to better than 6% for him, based on the structure, no?

[Shane]

Ross do you know how the deal for Heinz was structured?

[Ross812]

What did buffet just do? Heinz Ketchup has a 6% essentially guaranteed Growth Rate. He bought HNZ at a P/E of 24. Lets say a fair P/E is 15, so he essentially bought HNZ at 24/15 or 1.6x current value (comparable to 1.6x BV). At a 6% growth rate, Heinz will get back to intrinsic 15x p/e after 8 years of growth (1.06^8=1.6). This implies that Buffet anticipates a 3.3% GR for Brk over the same time period all things being equal. (1.3*Hnz.GR^8=BRK.GR^8)

 

I think his deal works out to better than 6% for him, based on the structure, no?

 

Ross do you know how the deal for Heinz was structured?

 

No, I remember from a Reuters Buffett paid for the majority of the company and Heinz management would be replaced by 3G, a private equity firm with ties to Inbev. I don't follow Berkshire that closely because I only have a small position in the company. I read that Buffett was replacing the management from Heinz which is typically out of character for him. What rate would you expect Heinz to grow at under new management? I really like what I have read about Inbev management when I was looking into BUD awhile ago.

 

[mcliu]

Let's put it simply. The numbers aren't exact, but it will simplify the rationale about BRK/FFH respective book values.

 

To me:

 

A dollar of BRK book is (slightly less) two birds in your hand that will hopefully give birth to 3 birds each over the next decade.

 

A dollar of FFH book is (slightly more) one bird in your hand that will hopefully give birth to 4 birds each over the next decade.

 

Agreed. You're basically getting compensated more for taking on greater risk.

[jay21]

What did buffet just do? Heinz Ketchup has a 6% essentially guaranteed Growth Rate. He bought HNZ at a P/E of 24. Lets say a fair P/E is 15, so he essentially bought HNZ at 24/15 or 1.6x current value (comparable to 1.6x BV). At a 6% growth rate, Heinz will get back to intrinsic 15x p/e after 8 years of growth (1.06^8=1.6). This implies that Buffet anticipates a 3.3% GR for Brk over the same time period all things being equal. (1.3*Hnz.GR^8=BRK.GR^8)

 

I think his deal works out to better than 6% for him, based on the structure, no?

 

Ross do you know how the deal for Heinz was structured?

 

No, I remember from a Reuters Buffett paid for the majority of the company and Heinz management would be replaced by 3G, a private equity firm with ties to Inbev. I don't follow Berkshire that closely because I only have a small position in the company. I read that Buffett was replacing the management from Heinz which is typically out of character for him. What rate would you expect Heinz to grow at under new management? I really like what I have read about Inbev management when I was looking into BUD awhile ago.

 

I think 3G thinks they can improve margins a lot and will see a good return that way.  Also, people think 3G knows emerging markets well and can accelerate growth that way.  So double digit EPS growth for 5 to 10 years (basically earnings will double and then grow at a lesser rate thereafter).