Author Topic: Fairfax 2020  (Read 218861 times)

bearprowler6

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Re: Fairfax 2020
« Reply #380 on: May 28, 2020, 01:30:24 PM »
Common equity is around $12 billion USD.

The company is selling right now for $7.5 billion - a $4.5 billion haircut off of book value. Ouch.

Investments in associates, India and Africa are marked to model (generously) and on the books for $7 billion.

If Mr. Market was optimistic about those assets then Fairfax would easily trade at a premium to book value (ie. for more than $12 billion). But, Mr. Market is so down on them that he's basically written them off.

It seems like at the current price you're getting a first-rate insurance operator for cheap (even if it has to pair back underwriting or renegotiate some debt covenants near term), and you're getting Recipe, Eurobank, the retailers, Thomas Cook, Bangalor Airport, etc, etc, etc for free (aka really really cheap).

On top of that you have restructured, global, investment and operations management teams better able to grow whatever's left standing post-covid. (For example, even if Recipe loses half its locations in the next two years, the remaining locations could face a third the competition and twice the profitability after that - who knows. Eurobank could be the last bank standing in Greece. The retailers could band together and unseat Amazon - ok ok the retailers are dead.) Chances are there will be at least something left to work with in the portfolio a few years from now.

In short, there's not even a hint of confidence, let alone optimism, priced into this stock right now.

Thrifty, I understand that the company is trading well below its book value. That point is not in dispute. A few questions need to be asked, first will the gap between the market price and book value close or at least narrow substantially and second, how long will it take to do so.

My view and that all it is....the market has things about right at the current moment. Although there are exceptions (Atlas being one) for the most part the investment held by Fairfax are not very good and in many cases the onset of Covid has severely and permanently impaired the value of many of their investments. As for how long,  I am solidly in the camp that the impact of Covid will last a lot longer than the general market seems to currently believe. As a result, I believe there are other investments (other than Fairfax) that offer better risk/reward profiles (with the emphasis on the risk aspect) than Fairfax currently does.

I believe the perfect storm has arrived and the low quality level of many of Fairfax's investments along with its elevated debt levels has truly exposed Fairfax. I hope and pray that I am wrong but I have positioned my overall portfolio with these beliefs in mind. You are clearly positioning your portfolio otherwise and I respect that.









Ballinvarosig Investors

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Re: Fairfax 2020
« Reply #381 on: May 28, 2020, 02:21:57 PM »
Thanks for the input Norm, but the optics are not good here with the numbers and the story surrounding Rivett leaving Fairfax. I doubt many shareholders would be impressed with what looks like a ‘sweetheart deal’.
I think you are wrong on this one.

Torstar was clearly a mistake and the chances of it turning around at this stage are very, very slim. If anything, it's more likely the equity here is going to zero, especially with covid blowing a hole in the balance sheet. My guess is that Fairfax realise this, but they also recognise that Torstar is a Canadian institution with a lot of jobs and history at stake. I am sure that Prem could push for an aggressive liquidation, or perform some asset stripping to squeeze a little bit of extra value, but do you think he is really going to destroy his and Fairfax's reputation for a few pennies? No, I think the proposed deal is more about going private, being able to save some money, having two dedicated owner operators who with both try and give Torstar its best chance at survival.

This sort of thing is not unknown in the newspaper biz these days. We had a newspaper group here in Ireland that was majority owned by insiders, had €80m net cash, was cash flow positive, yet it got sold for just €145m. These types of business are being priced for death probably because they are dead.

Thrifty3000

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Re: Fairfax 2020
« Reply #382 on: May 28, 2020, 04:10:39 PM »
Common equity is around $12 billion USD.

The company is selling right now for $7.5 billion - a $4.5 billion haircut off of book value. Ouch.

Investments in associates, India and Africa are marked to model (generously) and on the books for $7 billion.

If Mr. Market was optimistic about those assets then Fairfax would easily trade at a premium to book value (ie. for more than $12 billion). But, Mr. Market is so down on them that he's basically written them off.

It seems like at the current price you're getting a first-rate insurance operator for cheap (even if it has to pair back underwriting or renegotiate some debt covenants near term), and you're getting Recipe, Eurobank, the retailers, Thomas Cook, Bangalor Airport, etc, etc, etc for free (aka really really cheap).

On top of that you have restructured, global, investment and operations management teams better able to grow whatever's left standing post-covid. (For example, even if Recipe loses half its locations in the next two years, the remaining locations could face a third the competition and twice the profitability after that - who knows. Eurobank could be the last bank standing in Greece. The retailers could band together and unseat Amazon - ok ok the retailers are dead.) Chances are there will be at least something left to work with in the portfolio a few years from now.

In short, there's not even a hint of confidence, let alone optimism, priced into this stock right now.

Thrifty, I understand that the company is trading well below its book value. That point is not in dispute. A few questions need to be asked, first will the gap between the market price and book value close or at least narrow substantially and second, how long will it take to do so.

My view and that all it is....the market has things about right at the current moment. Although there are exceptions (Atlas being one) for the most part the investment held by Fairfax are not very good and in many cases the onset of Covid has severely and permanently impaired the value of many of their investments. As for how long,  I am solidly in the camp that the impact of Covid will last a lot longer than the general market seems to currently believe. As a result, I believe there are other investments (other than Fairfax) that offer better risk/reward profiles (with the emphasis on the risk aspect) than Fairfax currently does.

I believe the perfect storm has arrived and the low quality level of many of Fairfax's investments along with its elevated debt levels has truly exposed Fairfax. I hope and pray that I am wrong but I have positioned my overall portfolio with these beliefs in mind. You are clearly positioning your portfolio otherwise and I respect that.

Alright, let's imagine a pretty nightmarish 3 years to come:

- The only bright spot is $900 million dividend income annually for 3 years
- But, it's consumed by $800 million annual losses in associates (continuing the $205 million loss trend from Q1/2020)
- $0 underwriting profits annually thanks to mega cat losses
- $0 gains from investments annually
- The dividend is canceled and holding company cash dwindles a few hundred million per year to cover various costs
- While tax savings offset holding company interest expense.
- In summary: book value declines to, say, $10 or $11 billion in 3 years. (And Fairfax will have been dropped from the title of this website.)

Then in year 4 the sun comes out and it feels more like the 2017 - 2019 version of Fairfax:

- gains from investments and associates offset holding company costs, interest, taxes, etc
- underwriting profits return to a normalized $200 to $400 million
- interest income holds steady at $800 to $900 million
- $1.3 billion drops to the bottom line, of which $1 billion is attributed to common shareholders, and is celebrated by the owners of 28 million fully diluted common shares
- The world finally awakens to Fairfax's "normalized" earnings potential of $35.71428571428571 USD per share, and slaps a 16 multiple on it for a per share value of $571.4285714285714.

And there you have it, after buying your shares for $275 in 2020 you doubled your money in true Buffett-esqe style in less than 5 years.

Obviously it could play out a few different ways (ex: upon canceling the dividend the share price drops to $50 per share and FFH buys back millions of shares.).

But, am I willing to risk one twentieth of my liquid net worth (minus 25% held in cash) on it working out ok? In a word, yup.
« Last Edit: May 28, 2020, 04:52:06 PM by Thrifty3000 »

Parsad

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Re: Fairfax 2020
« Reply #383 on: May 28, 2020, 11:53:30 PM »
I think a dispassionate appraisal of Fairfax, assuming a continuation of the last decade’s performance as your base case, lands you somewhere in the neighborhood of:

- normalized earnings of $25 to $30 USD per share
- with earnings growth exceeding the pace of share dilution by a couple percentage points.

I’m certain Prem assumes a (much) higher growth rate. And, I’m intrigued by some of the new strategies in progress to achieve faster growth. Structuring specialized investment and management teams around targeted geographies and business models is interesting - and will create multiple channels for deploying capital to the highest return opportunities. For example, if Africa sucks while India thrives we’ll see much more capital concentrated in India than Africa over time (while many on this message board will be overlooking India and whining about Africa. Haha).

The Fairfax insurance operations are a cash machine, minting something like a hundred million dollars a month that has to be re-deployed. That’s not the world’s worst problem to have. If you or I had to deploy a hundred million a month for the next 10 years we’d probably make some billion dollar mistakes too.

The main questions are:

- are you comfortable with the baseline assumption
- if so, then what’s $25 to $30 per share - and growing - of passive, look-through, earnings worth to you (what will it likely be worth to others down the road)
- Are there better alternatives

The short answer is Fairfax is probably worth a good bit more than $270 USD.

With the debt, float and asset/equity leverage Fairfax uses...$30 USD average earnings is very low...I think normalized earnings based on today's book value and leverage, would be somewhere around $45-65 USD.  Cheers!
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petec

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Re: Fairfax 2020
« Reply #384 on: May 29, 2020, 12:40:46 AM »
I'm a little sceptical about the dividend income in the short term as several holdings (Recipe) have cancelled dividends.

Incidentally, this crisis shows the stupidity of buybacks over dividends in some cases. Recipe bought back a lot of stock in 2019. I am not in the doom and gloom camp on restaurants (I believe they will find ways to adapt) but there are clear structural challenges. In that situation, dividends strike me as a much better idea than buybacks.

But that is somewhat irrelevant here. Fairfax is dirt cheap. Many of its holdings are dirt cheap too, so there is a double discount. It has more cyclical exposure than some might like (bearprowler) but if you believe that the world will return to anything like normal in a reasonable space of time (which I do) Fairfax will be a beneficiary.
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bearprowler6

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Re: Fairfax 2020
« Reply #385 on: May 29, 2020, 05:30:05 AM »
Let’s assume Thrifty3000 is correct and Fairfax stock price doubles in the next 5 years producing a very nice compounded rate of return over that period for those who buy in now. Buffett like indeed!

Sadly however for those shareholders that have held Fairfax before Covid the return would be much less than impressive. In fact, if the doubling in share price occurs the share price would essentially get back to where it was about 5-6 years ago. So over what then is a 10-11 year period the rate of return would be much less Buffett like.

Does Fairfax represent an interesting opportunity at the current time. I would say yes with several caveats! Does it represent the best opportunity from the entire universe of possibilities---in my view not likely!

For the record, I have more invested in the equity markets now than prior to the outbreak of the pandemic. I was fortunate to come into the pandemic with a very healthy cash balance and was able to deploy a good portion of the cash into very high quality names that I had been following for years during the panic sell-off in late March. I still hold a smallish position in Fairfax although the position size relative to the size of my entire portfolio is significantly reduced from where it was several years ago and even from where it was at the beginning of the year. I was fortunate to sell off a significant portion of the Fairfax shares I held earlier this year as the pandemic news started to break – some above $600 CAD and some above $500 CAD. I sold the shares this year because I believed that Fairfax was not positioned (for all the reasons I have been writing about) to hold up well to what I expected would be a very difficult economic environment.

So where does that leave things--- I believe that a decent rate of return can perhaps be made on Fairfax from these levels however other opportunities (e.g, certain reits, certain oil & gas names, CB or TRV if one insists on property & casualty exposure and perhaps even a direct investment into either or both Atco and Blackberry) of higher quality (my judgement) and of equal or greater rate of return potential  are available and should be considered over an investment into Fairfax at this time.


Bryggen

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Re: Fairfax 2020
« Reply #386 on: June 01, 2020, 11:23:54 AM »
Fairfax Held Talks to Acquire Remaining Shares of BlackBerry (BB) - Source

Surprised? Not really. Positive? Probably.

https://www.streetinsider.com/Hot+M+and+A/Fairfax+Held+Talks+to+Acquire+Remaining+Shares+of+BlackBerry+%28BB%29+-+Source/16955634.html


Thoughts?

TwoCitiesCapital

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Re: Fairfax 2020
« Reply #387 on: June 01, 2020, 11:30:29 AM »
Fairfax Held Talks to Acquire Remaining Shares of BlackBerry (BB) - Source

Surprised? Not really. Positive? Probably.

https://www.streetinsider.com/Hot+M+and+A/Fairfax+Held+Talks+to+Acquire+Remaining+Shares+of+BlackBerry+%28BB%29+-+Source/16955634.html


Thoughts?

Behind a paywall, so I can't see all of the details. That being said, I got burned betting on Blackberry the LAST time Fairfax announced the intended acquisition of the remainder of the company, so hesitant to believe it'll actually happen this time around - though shares are much cheaper.

omagh

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Re: Fairfax 2020
« Reply #388 on: June 01, 2020, 12:12:50 PM »
Fairfax Held Talks to Acquire Remaining Shares of BlackBerry (BB) - Source

Surprised? Not really. Positive? Probably.

https://www.streetinsider.com/Hot+M+and+A/Fairfax+Held+Talks+to+Acquire+Remaining+Shares+of+BlackBerry+%28BB%29+-+Source/16955634.html


Thoughts?

It looks like due diligence is going on from BB side.  Not much news...
https://seekingalpha.com/news/3579210-fairfax-held-talks-to-buy-remaining-shares-of-blackberry-street-insider
BlackBerry (BB +5.2%) surges as much as 7% after Street Insider reported Fairfax Financial recently held talks to acquire the remaining shares it did not already own.

According to the article, BlackBerry has formed a special committee and hired bankers to assist in the potential acquisition.

More to come...

rb

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Re: Fairfax 2020
« Reply #389 on: June 01, 2020, 12:42:21 PM »
Oh great! Buying more dogshit!

Btw it's real, just got an email from a buddy of mine that works there. The guys are prepping their resumes to leave after they get vested by this deal.