Author Topic: 2017 q4 result out!  (Read 18479 times)

Viking

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Re: 2017 q4 result out!
« Reply #50 on: February 20, 2018, 12:23:46 PM »
Results came out on the 15th.

On the 16th, Crip and I both pointed out that there often seems to be a time lag between the time the results come out and share price movement.

Share price has barely moved until today and now pops 4-5%. This happens quite frequently and is almost like having advance knowledge of the results.

+1


gokou3

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Re: 2017 q4 result out!
« Reply #51 on: February 20, 2018, 12:51:41 PM »
Results came out on the 15th.

On the 16th, Crip and I both pointed out that there often seems to be a time lag between the time the results come out and share price movement.

Share price has barely moved until today and now pops 4-5%. This happens quite frequently and is almost like having advance knowledge of the results.

I wonder if it is due to the re-opening of the share buyback window after earning release?  Trading volume for FFH is low, so even at Q4's buyback pace that represented a few % of daily volume.

StubbleJumper

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Re: 2017 q4 result out!
« Reply #52 on: February 20, 2018, 01:02:31 PM »
Results came out on the 15th.

On the 16th, Crip and I both pointed out that there often seems to be a time lag between the time the results come out and share price movement.

Share price has barely moved until today and now pops 4-5%. This happens quite frequently and is almost like having advance knowledge of the results.

I wonder if it is due to the re-opening of the share buyback window after earning release?  Trading volume for FFH is low, so even at Q4's buyback pace that represented a few % of daily volume.


My vague recollection is that there was a presser last year saying that FFH engaged an investing outfit somewhere to continue to do a systematic buyback even during the quiet period.  Has my memory failed me?

EDIT:  Yes, I found it:

TORONTO, Sept. 29, 2017 (GLOBE NEWSWIRE) -- Fairfax Financial Holdings Limited (“Fairfax”) (TSX:FFH) (TSX:FFH.U) announces that, in connection with its previously announced normal course issuer bid effective September 28, 2017 (the “NCIB”), it has entered into an automatic share purchase plan (the “ASPP”) with a designated broker to allow for the purchase of its Subordinate Voting Shares under the NCIB at times when Fairfax normally would not be active in the market due to applicable regulatory restrictions or internal trading black-out periods. Before the commencement of any particular internal trading black-out period, Fairfax may, but is not required to, instruct its designated broker to make purchases of Subordinate Voting Shares under the NCIB during the ensuing black-out period in accordance with the terms of the ASPP.  Such purchases will be determined by the broker in its sole discretion based on parameters established by Fairfax prior to commencement of the applicable black-out period in accordance with the terms of the ASPP and applicable Toronto Stock Exchange rules. Outside of these black-out periods, Subordinate Voting Shares will continue to be purchasable by Fairfax at its discretion under its NCIB.

The ASPP commenced on September 28, 2017 and will terminate on the earliest of the date on which: (a) the maximum annual purchase limit under the NCIB has been reached; (b) the NCIB expires; or (c) Fairfax terminates the ASPP in accordance with its terms. The ASPP constitutes an “automatic securities purchase plan” under applicable Canadian securities laws.

Fairfax is a holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and investment management.

For further information contact:    John Varnell, Vice President, Corporate Development,
    at (416) 367-4941



SJ
« Last Edit: February 20, 2018, 01:04:04 PM by StubbleJumper »

petec

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Re: 2017 q4 result out!
« Reply #53 on: February 22, 2018, 02:05:54 AM »
As I have mentioned countless times, there is no ROE generated if you exclude capital gains. So to trade well above book and generate the respect that you guys seek they have 2 choices:

1- Grow really fast like in the late 80's and 90's by acquiring company after company with an overvalued currency.
2- Generate a portion of the return via sound, repeatable earnings. That means low cost, less interest paid, profitable underwriting and more deployed into sound investments with the blessings of regulators.


I think this makes a lot of sense. But I also think #2 is starting to be built. Compare the $425m of interest and dividend income reported for 2017 with what we (think we) know about the underlying portfolio:
- $9bn in bonds gets you $270m even if they're all in the 10-year - the real number will be higher.
- with the 2-year at 2.25% the $20bn in cash has earnings power of $450m without taking any real risk.
- $750m prefs and debentures announced in 2017 at 5-6% so about $40m of income - assuming they all got drawn - I am not sure if they did.
- $500m of committed investment at Arena (assuming Westaim drew all three tranches of prefs) earns 12% for another $60m once it is all deployed - or more if Arena levers as Zwirn's old shop did.

Add some dividends on stocks and you've more than doubled the 2017 reported number over a fixed holdco+interest cost base. Add consistent underwriting at say 98%, some cash flows from non-insurance subsids, some fees from FIH and FAH, and refinance your debts at lower rates, and you're starting to generate a base of sound, repeatable earnings. Not enough to justify much over 1x book, but the trend is in the right direction.

Not that it bothers me much - I am very happy to hold at book value and have my returns come from the investing side.

Cardboard

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Re: 2017 q4 result out!
« Reply #54 on: February 22, 2018, 03:03:57 AM »
Good post Petec.

If they continue heading in that direction, it will work out but, it will take time for the market to consider this the new state. Buffett has done it for decades now and it does not trade at a large multiple of book value.

And these bonds or cash holdings are not permanent positions like a Precision Castparts or a BNSF. These will be sold or invested elsewhere.

So yes, if they do well and earn money, the stock should follow that rate of progress. However, to call Fairfax a table pounding opportunity at this point because it should pop and simply trade at a much higher multiple of book is wrong IMO.

Actually the market is likely making a favour to these people if they are true investors and not just looking for a quick exit or instant gratification since it allows to repurchase shares at a reasonable price which combined with a potentially profitable future that we just alluded to leads to a higher investment return.

Cardboard

Spekulatius

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Re: 2017 q4 result out!
« Reply #55 on: February 22, 2018, 04:06:54 AM »
Once sound underwriting is in place, they can easily generate 8-10% ROE just with solid income from bonds and investments - no home runs needed. That is the model thwt most insurance companies work towards like WRB or TRV (to name a few good ones) and they are doing quite well now and will do even better with higher interest rates.

If they are doing well on the investment side, they probably can do a mid teens ROE and then they would deserve a 1.5-2x book value.
To be a realist, one has to believe in miracles.

petec

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Re: 2017 q4 result out!
« Reply #56 on: February 22, 2018, 04:51:57 AM »
And these bonds or cash holdings are not permanent positions like a Precision Castparts or a BNSF. These will be sold or invested elsewhere.

Agreed. That said, in the hands of competent investors (and I realise we all have different views about whether that applies here) investments that can be changes ought to compound faster than those that can't. Now, you might not get a premium to BV (on the basis that the portfolio can be replicated at BV externally) but you still compound faster. I am quite happy not to have *too* much money caught up in big operating business.

Totally agree about a pop above BV. That's not the core of the opportunity here.

StubbleJumper

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Re: 2017 q4 result out!
« Reply #57 on: February 22, 2018, 06:29:32 AM »
Good post Petec.

If they continue heading in that direction, it will work out but, it will take time for the market to consider this the new state. Buffett has done it for decades now and it does not trade at a large multiple of book value.

And these bonds or cash holdings are not permanent positions like a Precision Castparts or a BNSF. These will be sold or invested elsewhere.

So yes, if they do well and earn money, the stock should follow that rate of progress. However, to call Fairfax a table pounding opportunity at this point because it should pop and simply trade at a much higher multiple of book is wrong IMO.

Actually the market is likely making a favour to these people if they are true investors and not just looking for a quick exit or instant gratification since it allows to repurchase shares at a reasonable price which combined with a potentially profitable future that we just alluded to leads to a higher investment return.

Cardboard



Cardboard, two or three days ago, FFH was trading pretty much bang-on at book value.  My heuristic for BV (or at least a BV that is mostly tangible) is that this is the point where the business as a going concern offers zero value.  This is the point where, if one could liquidate the assets for a "fair price" and put the business in run-off, you'd be equally well off to do so.

So, I'd say that FFH deserves to trade above book.  There's plenty of room to debate about how much above book it ought to trade, but my take is that this thing is not worth more dead than alive.


SJ

Txvestor

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Re: 2017 q4 result out!
« Reply #58 on: February 22, 2018, 07:00:04 AM »
Good post Petec.

If they continue heading in that direction, it will work out but, it will take time for the market to consider this the new state. Buffett has done it for decades now and it does not trade at a large multiple of book value.

And these bonds or cash holdings are not permanent positions like a Precision Castparts or a BNSF. These will be sold or invested elsewhere.

So yes, if they do well and earn money, the stock should follow that rate of progress. However, to call Fairfax a table pounding opportunity at this point because it should pop and simply trade at a much higher multiple of book is wrong IMO.

Actually the market is likely making a favour to these people if they are true investors and not just looking for a quick exit or instant gratification since it allows to repurchase shares at a reasonable price which combined with a potentially profitable future that we just alluded to leads to a higher investment return.

Cardboard



Cardboard, two or three days ago, FFH was trading pretty much bang-on at book value.  My heuristic for BV (or at least a BV that is mostly tangible) is that this is the point where the business as a going concern offers zero value.  This is the point where, if one could liquidate the assets for a "fair price" and put the business in run-off, you'd be equally well off to do so.

So, I'd say that FFH deserves to trade above book.  There's plenty of room to debate about how much above book it ought to trade, but my take is that this thing is not worth more dead than alive.


SJ

Agree with you on this stuble. In addition the recent subsidiary sales transactions demonstrated value above BV as well. I think the market here is discounting recent poor investment performance and extrapolating that into the future. I can't say that is unreasonable. MKL deserves their stock price being above BV. They have invested well, acquired non-dilutively, and outperformed the markets consistently. If Fairfax does that for 5 yr, they will rerate as well. Will that happen? I am not so sure. But the investment thesis here is thet even without hitting it out of the park, they should be able to consistently grow BV 10-12% a year, a feat that has eluded them over recent times. Even that would get them to a higer multiple than 1BV. Prem just has to make sure he doesn't trip over his shoelaces yet again.
« Last Edit: February 22, 2018, 07:03:08 AM by Txvestor »

petec

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Re: 2017 q4 result out!
« Reply #59 on: February 22, 2018, 07:30:31 AM »
Cardboard, two or three days ago, FFH was trading pretty much bang-on at book value.  My heuristic for BV (or at least a BV that is mostly tangible) is that this is the point where the business as a going concern offers zero value.  This is the point where, if one could liquidate the assets for a "fair price" and put the business in run-off, you'd be equally well off to do so.


Surely it should trade at 1xBV if the ROE=your cost of capital? If, for example, it generates a ROE of 10% but you've got a stack of ideas that offer a 20% return, you'd pay 0.5x book. If it generates 7% and your threshold is 7%, then you'd pay 1x.

Putting it another way, it is true to say that at BV the business is worth an equal amount as a going concern or liquidated, but only if the proceeds of liquidation are put into something else that generates your required rate of return. But it is not true to say that a business generating a 0% ROE, or a 2% ROE, is worth 1x BV whether it is kept going or liquidated. If the ROE is below your cost of capital then the business is only worth 1xBV if it is liquidated. If not, it is worth less.

Fairfax, assuming a fair long run return on a broad basket of stocks is 7%, should trade on 1xBV if the ROE is 7%. If the ROE is higher based on operating earnings then you could argue for a higher multiple, but that's not so easy if the higher ROE is based on investing results because you can, to an extent, replicate Fairfax's investments at 1xBV. The only reason you'd pay >1xBV for investment results is if the managers had an exceptional record and you couldn't successfully replicate the portfolio. So for example, if FFH puts their $20bn of cash to work in the 2y treasury you wouldn't pay >1xBV for that - but you might pay >1xBV for the investments where they have an advantaged position as a preferred provider of capital.

Oddly, therefore, 1xBV or not much higher might be the right price for FFH even if the equity compounds at 15%. It takes a bit to get my head round that but I think it's mathematically true. It's actually what I find very attractive about the stock - the likelihood that it will remain reasonably priced while compounding nicely.

« Last Edit: February 22, 2018, 07:37:14 AM by petec »