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Fairfax Earnings


Guest Dazel
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It is much harder to determine a second quarter number than we have had in the past. This is an excellent problem to have! There have been many great posts and great spread sheets created to deal with FFH's US equities which are the biggest contributor to earnings this quarter (massive). It is the other that we have been looking at...here are the wild cards. We would rather not even speculate a number other than very BIG!

 

-$700m in securities outside of the US

-Muni's continued appreciation in the quarter

-large corporate bond purchases (higher yields and likely capital gains taken)

-long term US treasury yields spiked in the quarter (30 year yield went from 2.52% dec to 4.8%) which may have provided another entry point (Hoisington in April was still recommending the long end)

-It was a relatively calm quarter on the insurance side so underwriting should be strong

-The higher Muni, corporate yields and common stock dividends will be in the range of $170m if they were not sold

-Northbridge should have had a great quarter and Fairfax will have all of the earnings go to the bottom line

 

Negatives (The market is looking at these too much in our opinion)

-Abitibi bankruptsy

-SFK, Canwest, Mega brands etc

-The CDS portfolio is no longer relavent

-other securities that we do not know about that need to be written down

 

We believe that if we can"t figure out a number than there is no way that the analysts are going to try (even if it is a good one). We also believe that negatives above are the only ones being considered by the investing public. Fairfax and Prem Watsa have been publically recognized for the credit default swap bet. They are also getting press in Canada for their investment failures (above). We are happy with this perception problem as we think it is going to make us a lot of money. We continue to be blown away by the Fairfax management and their fantastic performance. We are looking forward to the report!

 

 

Dazel.

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Very good points Dazel.

 

To me, the main pros are BRK munis, increased allocation to equities overall, disciplined underwriting.

 

The main con is the canadians "cigar butt" investments. The price depreciation of some of them reflect what's happening in the business and it is not only the result of a short term voting machine.

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When do they report?

 

 

Fairfax Financial Holdings Limited (TSX:FFH - News)(NYSE:FFH - News) will hold a conference call at 8:30 a.m. Eastern Time on Friday, July 31, 2009 to discuss its 2009 second quarter results which will be announced after the close of markets on Thursday, July 30, and will be available at that time on its website www.fairfax.ca. The call, consisting of a presentation by the company followed by a question period, may be accessed at (800) 857-9835 (Canada and U.S.) or 1 (212) 287-1677 (International) with the passcode "Fairfax".

 

A replay of the call will be available from shortly after the termination of the call until 5:00 p.m. Eastern Time on Friday, August 14, 2009. The replay may be accessed at (800) 337-4110 (Canada and U.S.) or 1 (203) 369-3797 (International).

 

 

 

I cant wait to read it.

 

 

ECCO

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Vertex One, longtime holder of Fairfax, sees a spectacular gain in book value this quarter:

 

"It’s only a wild guess but reviewing Fairfax’s investment portfolio it looks to me as though their second quarter book value growth will be higher than $50 a share (possibly closer to $75) - an increase of over 15%."

 

 

http://www.vertexone.com/snapfiles/Commentary/Q209_JUN09_-_MV.pdf

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Well that Vertex One letter was...interesting.  I don't think I've run across any other such bold assertions regarding FFH's 2nd quarter returns.  I'd certainly love to believe it but they don't provide a whole lot of reasoning.  Looking forward to next Friday to see just what's what.

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Should we see earnings per share in this range, growth in BV would be:

$50 / $255 = 19.6%; $75 / $255 = 29.4%.

 

EPS won't be near that high.  Book value growth may be though.  Mark-to-Market unrealized gains on stocks & bonds are not taken through EPS until they are realized.  They do however, hit the balance sheet through OCI.

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From updating the values of the equities we know of, along with the known change since they reported Q1 and estimates for bonds etc. it looks to me like FFH book value per share should be about $300.00 US at the end of Q2.

 

If one is to assume that they made a small underwriting profit and take into account the higher investment income, it could be as high as $310 in my opinion

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We are in the same camp as Vertex One...likely in the middle at $60 per share book value..speculation on the numbers we see.

$7 operating earnings

$35 common stock

$18 bonds including corporates

 

However, unlike other years the yield on the portfolio will have risen. Those of us who have been around for awhile understand that the investing public and Rating agencies have not given Fairfax credit for the massive capital gains they have acheived over their life time. They have focused on operating income. It looks like Fairfax will have both this year...you would think someone would notice!

 

We have never been more comfortable with the insurance operations as we believe that Fairfax has sandbagged for the last two years. We believe they have beefed up their reserves.Why? They paid $1 billion dollars in tax last year! If it were us we would be taking the most conservative reserves we could because it is tax effective. Buffett has mastered this technique. Save tax dollars now and have favourable reserves later...it is tax deferral. This is purely speculation on our part but it makes perfect sense. Fairfax does not need a hard market to make money and neither did Buffett when he was doing 50% returns on book value in the early 80's. It is the float that matters now that Fairfax has fixed its insurance operations.

 

Dazel.

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I have a non-related question.

 

Several posters speak in the plural ("We") when talking.  Dazel, Sharper, and a few others.

 

Why is this?  Dazel, I don't remember you always doing this... why the change?

 

I'm just curious, not critical.  I just don't get it...

 

Ben

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I have a non-related question.

 

Several posters speak in the plural ("We") when talking.  Dazel, Sharper, and a few others.

 

Why is this?  Dazel, I don't remember you always doing this... why the change?

 

I'm just curious, not critical.  I just don't get it...

 

Ben

 

Probably relates to the firm the poster is working for I gather. I'm not sure.

But I've used plural form in the past because of the aforementioned reason.

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The Vertex guys are smart guys...Jeff's office is a block from me, as is Tim McElvaines...we're forming the area of concentration in Vancouver for value managers!  ;D  I've had coffee with Jeff, and they know what they are doing...good guys.  I think the $75 number is at the high end, but $50+ change in book is probably accurate.  Cheers!  

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"Several posters speak in the plural ("We") when talking.  Dazel, Sharper, and a few others"

 

Speaking only for myself.

 

I manage the family investments as a sideline, & am training 2 nephews in the darkarts of finance - hence the 'we'. Part of their training is that they can each make a BS/PL 'dance', & that they each have to present a new idea on the back of an envelope every quarter-end. If it survives the 20 questions, we put real money on it (a very small allocation from the main portfolio)  ;)

 

They're at the table whenever the major decisions are made, & are there to ask questions & learn by osmosis. Once/year they have to present a business plan to a small businessman, buy some inventory, & then help in selling it through his/her store (preferably something edible in case they screw up)  :D Real life experience, with 20% of their gross going to charity and another 20% going to travel. Taxation.

 

They also read this board as well

 

SD

 

 

 

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That's awesome Sharper!  What a terrific thing for them to learn while young.  I especially like the presenting a businessplan idea and then actually putting it into effect...great stuff!  On that subject, I'll start a thread on how people teach their family about money.  Cheers!

 

 

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Ben,

 

"We" is habit as I have partners...I have been writing on Fairfax here since early 2003...so "we" have grown over the years...Just for a reminder to those that are new...Fairfax was trading at about $80 cdn in those days.

 

Dazel.

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Sorry "I" (BEN) hate to brag but "I" missed by a few pennies...and yes yield has risen...

 

"We are in the same camp as Vertex One...likely in the middle at $60 per share book value..speculation on the numbers we see.

$7 operating earnings

$35 common stock

$18 bonds including corporates

 

However, unlike other years the yield on the portfolio will have risen. Those of us who have been around for awhile understand that the investing public and Rating agencies have not given Fairfax credit for the massive capital gains they have acheived over their life time. They have focused on operating income. It looks like Fairfax will have both this year...you would think someone would notice! "

 

Dazel

 

 

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