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Is Fairfax a Bargain? Sounds Like Prem Thinks So...
Posted by: The Science of Hitting (IP Logged)
Date: March 12, 2012 05:26PM
In September of last year, GuruFocus interviewed Prem Watsa, chairman and chief executive of Fairfax Financial Holdings; here are some of the interesting things Mr. Watsa had to say about Fairfax and its valuation (bold added for emphasis):
Watsa: So we have a 15% compounded growth rate, and we think that growth rate continues to be achievable for us. Our capital base is about $8 billion, our investment portfolio is at $24 billion, business premiums are written at about $5 billion, we have international businesses, if you take our equity holdings in companies like ICICI Lombard and the Chinese company, Alltrust, and the others we list in our annual report, at about another $1.5 billion, so we have about $6.5 billion in aggregate premium. So it’s significantly larger than where we began 25 years ago, but in terms of the world markets, we think that there's a lot of opportunity to grow over time and make a 15% real return, which is making an underwriting profit plus interest and dividend income plus capital gains all after-tax. So you put all of that together, we figure mark-to-market book value, including the dividends that we pay out, will over time compound book value at 15% a year. But you know we're not quarterly focused, we've never issued guidance, we've never given any quarterly numbers, so we're focused on performing over a long period of time.
GuruFocus: So you feel comfortable over the long term, 15% is still achievable.
Watsa: Yes, that rate of return continues to be our goal.
In regard to Fairfax’s intrinsic value, Prem had this to say:
Watsa: Our book value at the end of June of this year was approximately $360 per share, as reported in our quarterly statement. But about intrinsic value, if you look at the fact that our rate of return has been very significant over 5 years, 10 years, 15 years, 25 years, then the intrinsic values of our companies are significantly higher than our book value. Change in book value is not a bad way of looking at change in intrinsic value, but if you think we can make 15% a year as our target, we've achieved better than that in the past, nothing to say we'll achieve that in the next five years, but if we do, then of course the intrinsic value of our company is significantly higher than our book value.
GuruFocus: But you cannot put a number on it?
Watsa: No, that's what I leave for you and all the analysts and everyone who follows us.
While Prem still hasn’t put a number on it, his wording on page 10 of his 2011 letter to shareholders (which came out last Friday) suggests that the shares are increasingly attractive (from his perspective):
“Our stock price is currently reflecting the short term volatility of earnings rather than the buildup of long term intrinsic value. We think you will see the long term intrinsic value being reflected in time (we hope!!).”
At roughly $400 per share, Fairfax trades around 1.1x book (as reported at the end of fiscal year 2011); considering the company’s track record, investors might want to take a second look to see if Fairfax is a bargain.