Billionaire investor Prem Watsa (Trades, Portfolio), leader of Fairfax Financial Holdings (TSX:FFH, Financial), revealed he increased his exposure to his top holding, Atlas Corp. (ATCO, Financial), by 31.7% earlier this week.
Known as “Canada’s Warren Buffett (Trades, Portfolio),” the guru’s investment strategy mimics the practices of the Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) CEO in that his insurance conglomerate purchases entire companies as well as invests its float in publicly traded companies in order to achieve a high rate of return.
After upping the stake by 0.12% during the second quarter, GuruFocus Real-Time Picks, a Premium feature, reported Watsa gained another 31.6 million shares of the company on Aug. 23. A week prior on Aug. 16, Atlas disclosed its Seaspan Corp. subsidiary intended to redeem all of its remaining 5.5% senior notes held by Fairfax affiliates in exchange for cash. This consisted of $250 million worth of senior notes due in 2025 and $50 million worth of notes due in 2026. The redemption price per Fairfax note was set at $1,000 plus all accrued and unpaid interest.
On the day of the transaction, shares traded for an average price of $13.87 each. The exchange had an impact of 12.39% on the equity portfolio.
The Canadian guru’s firm now holds 131.6 million shares total, which account for 51.46% of the equity portfolio. GuruFocus estimates Watsa has gained 35.7% on the investment since establishing it in the second quarter of 2018.
The global asset management company targets long-term, risk-adjusted returns by investing in high-quality assets in the maritime and energy sectors as well as other infrastructure verticals. Atlas has a $3.52 billion market cap; its shares were trading around $14.24 on Thursday with a price-earnings ratio of 24.56, a price-book ratio of 0.95 and a price-sales ratio of 2.44.
The GF Value Line suggests the stock is significantly overvalued currently based on historical ratios, past performance and future earnings projections.
The valuation rank of 5 out of 10 is more in favor of its being fairly valued even though the price-earnings and price-sales ratios are closing in on multiyear highs.
On Aug. 9, the company reported its second-quarter financial results. Revenue grew 8.3% from the prior-year quarter to $393.9 million. It posted adjusted earnings of 39 cents per share, which was an improvement of 50% from a year ago.
In his annual letter for 2020, Watsa noted the company’s leadership team did a “tremendous job driving shareholder value, operational excellence and strengthening Atlas' leading positions” during the downturn caused by the Covid-19 pandemic.
“Atlas was able to maintain very high utilization and improve its credit profile,” he wrote. “The container ship market, supported by strong demand and very low idle capacity, is undergoing a significant rebound. This has created an opportunity in the newbuild market, where Atlas has signed to build up to 31 large and modern ships for charters ranging from 5 to 18 years. These ships will increase its fleet capacity by approximately 45%. Atlas' best in class operations and balance sheet strength allowed it to take advantage of these opportunities. These new ships, the rebound in the container ship market and Atlas' ability to quickly take advantage of strategic opportunities should drive strong returns in the years to come.”
GuruFocus rated Atlas’ financial strength 3 out of 10. As a result of issuing new long-term debt over the past three years, the company has poor interest coverage. The Altman Z-Score of 0.59 also warns the company could be at risk of bankruptcy if it does not improve its liquidity position.
The company’s profitability fared better, scoring a 6 out of 10 rating on the back of an expanding operating margin. Its returns on equity, assets and capital, however, underperform over half of its competitors. Atlas also has a moderate Piotroski F-Score of 6 out of 9, indicating conditions are typical for a stable company. The predictability rank of one out of five stars, though, is on watch as a result of revenue per share declining over the past five years.
With a 53.29% stake, Watsa is by far Atlas’ largest guru shareholder. Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Paul Tudor Jones (Trades, Portfolio) and Michael Price (Trades, Portfolio) also own the stock.
Portfolio composition and additional holdings
Nearly half of the guru’s $3.11 billion equity portfolio, which consisted of 59 stocks as of the three months ended June 30, was invested in the financial services sector, followed by much smaller positions in the technology (20.78%) and basic materials (12.06%) spaces.
Other financial companies Watsa is currently invested in are Brookfield Asset Management Reinsurance Partners Ltd. (BAMR, Financial), Crescent Capital BDC Inc. (CCAP, Financial), Franklin Resources Inc. (BEN, Financial), Bank of Nova Scotia (BNS, Financial), Brookfield Asset Management Inc. (BAM, Financial), KKR & Co. Inc. (KKR, Financial), Fidelity National Financial Inc. (FNF, Financial) and Berkshire Hathaway.
