Jeffrey Stacey January 2021 - Stacey Muirhead Capital Management - MOI Global
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Jeffrey Stacey
Stacey Muirhead Capital Management
January 2021
1
Disclaimer
Stacey Muirhead Capital Management Ltd. (the “Firm”) is not providing investment advice through this material. This presentation is
provided for informational purpose only as an illustration of the Firm’s investment philosophy and shall not be considered investment
advice or a recommendation or solicitation to buy or sell any securities discussed herein, and does not contain enough information to
be considered a recommendation or a research report.
As of the date of this presentation the Firm continues to own the securities discussed herein. These opinions are not intended to be a
forecast of future events, a guarantee of future results, or investment advice. Past performance is not indicative of future results, and no
representation or warranty, express or implied, is made regarding future performance.
The Firm may engage in securities transactions that are inconsistent with this communication and may have long or short positions in
such securities. The information and any opinions contained herein are as of the date of this material, and the Firm does not undertake
any obligation to update them.
This material does not take into account individual investor circumstances, objectives, or needs and is not intended as a
recommendation to any person who is not a client of the firm. Securities, financial instruments, products or strategies mentioned in this
material may not be suitable for all investors. The Firm does not provide tax advice. Investors should seek tax advice based on their
particular circumstances from an independent tax advisor.
In reaching a determination as to the appropriateness of any proposed transaction or strategy, investors should undertake a thorough
independent review of the legal, regulatory, credit, accounting and economic consequences of such transaction in relation to their
particular circumstances and make their own independent decisions. By virtue of this publication, neither the Firm nor any of its
employees shall be responsible for any investment decision.
This confidential presentation contains information that has been compiled, by the Firm, from sources believed to be reliable; however,
there can be no guarantee as to the accuracy or completeness of such information. It also contains statements, estimates and
projections made by various third party companies with respect to their historical and projected performance. There can be no
assurance that such statements, estimates and projections will be realized and actual results may vary materially from those indicated.
Further, in any case, the Firm does not represent nor is affiliated with any of the third party companies and other entities named and
makes no representations as to the reasonableness of such assumptions or the accuracy or completeness of the information contained
herein. These materials are for the confidential use of only those persons to whom it is transmitted.
2
The Stacey Muirhead Process
Does it possess outstanding business economics?
Does it have honest and capable management?
Can it be purchased at an attractive price?
GREAT BUSINESS GREAT PEOPLE GREAT PRICE
3
Does it possess outstanding business economics?
• High returns on shareholders’ equity
• A strong balance sheet with minimal or no debt
• Attractive operating and profit margins
• Significant brand recognition
• Pricing power for its products
• Growing revenue and earnings over time
• Consistent free cash flow generation
4
Does it have honest and capable management?
• “Skin in the game”
• Reasonable compensation practices
• Measurable pay for performance
• Demonstrated integrity
• Capital allocation record
• Unique corporate culture
5
Can it be purchased at an attractive price?
“Your goal as an investor should be simply to purchase
at a rational price a part interest in an easily
understood business whose earnings are virtually
certain to be materially higher, five, ten or twenty years
from now.”
Warren Buffett
6My Best Idea for 2021
7Fairfax Financial Holdings
Corporate Overview
• Fairfax is a global property and casualty insurance and
reinsurance company
• Founded in 1985 by V. Prem Watsa
• Corporate objective is to compound book value per share by 15%
annually over the long term
• Fairfax is committed to transparent and complete disclosure to
shareholders
• Based in Toronto, Ontario
8Fairfax Financial Holdings
A Global Property and Casualty Insurance Platform
9Fairfax Financial Holdings
A Diversified Portfolio of Non-Insurance Businesses
10Fairfax Financial Holdings Market Data • Current Share Price (12/31) $340.94 * • Shares Outstanding 26,235,991 • Market Capitalization $8.8 B • Book Value/Share (09/30) $442.17 • Dividend/Share $10.00 • Dividend Yield 2.9% * All figures are in USD unless otherwise noted 11
Fairfax Financial Holdings
Does it possess superior
business economics?
12Fairfax Financial Holdings
The Record (1986 – 2019)
Book Value/Share CAGR 19.3%
Peer Group * 18.9%
Share Price CAGR 17.8%
Peer Group * 18.2%
* Markel Corporation and Berkshire Hathaway 13Fairfax Financial Holdings
Key Drivers of Value Creation
• Insurance Underwriting
• Float Generation
• Investments (Interest, Dividends, Capital Gains)
• Non-Insurance Businesses (Operating Income, Capital Gains)
14Fairfax Financial Holdings
Insurance Underwriting
Average
Period Combined Ratio
1986 – 1990 106.7%
1991 – 1995 104.2%
1996 – 2000 114.4%
2001 – 2005 105.4%
2006 – 2010 99.9%
2011 – 2016 96.0%
2017 – 2019 99.8%
2020 – YTD 98.6%
15Fairfax Financial Holdings
Float Generation
Average Cost Average Long Term
Float (Benefit) Canada Treasury
Year (in $ Millions) of float Bond Yield
1986 22 (11.6)% 9.6%
2009 9,429 (0.1)% 3.9%
2019 20,150 (2.0)% 1.8%
Weighted average last ten years (1.0)% 2.5%
Fairfax weighted average financing differential last ten years: 3.5%
16Fairfax Financial Holdings
Float Generation
Total Float Float
(in $ Millions) per Share
1985 13 $ 2.5
1990 164 30
1995 653 74
2000 5,877 449
2005 8,757 492
2010 13,110 641
2018 22,718 834
2019 22,379 834
17Fairfax Financial Holdings
Reserve Development
Reserve Redundancy
Year (Combined Ratio Points)
2020 – 9 months 2.7 pts
2019 3.8
2018 6.8
2017 5.1
2016 8.5
2015 7.8
18Fairfax Financial Holdings
Insurance Underwriting-Key Takeaways
• Insurance rates are skyrocketing!
• Net premiums written increased 12.6% in Q3 and 9.4% YTD
• COVID losses of $536 million YTD (60% are IBNR)
• “All-in” combined ratio of 98.6% YTD
• “Core” combined ratio of 89.2% YTD
• Favourable reserve development continues (2.7% in 2020)
19Fairfax Financial Holdings
Investments
Average Total
Period Return on Investments
1986 – 1990 10.4%
1991 – 1995 9.7%
1996 – 2000 8.8%
2001 – 2005 8.6%
2006 – 2010 11.0%
2011 – 2016 2.3%
2017 – 2019 5.6%
Since Inception 8.0%
20Fairfax Financial Holdings
Investments – Key Equity Portfolio Holdings
Ownership Price Price Gain/Loss
Name (in millions) (09/30) (12/31) (in $ millions)
Atlas (shares/warrants) 150.3 $8.94 $10.84 $285.6
BlackBerry (shares/converts) 101.7 $4.59 $6.63 $129.9
Eurobank 1,159.3 €0.38 €0.58 $281.6
Kennedy Wilson 13.3 $14.52 $17.89 $44.8
Quess 47.6 ₹412.60 ₹537.80 $81.5
Resolute Forest Products 30.6 $4.48 $6.54 $63.0
Stelco 13.0 $11.36* $22.73* $147.8
Total $1034.20
Per Share $39.42
* in CAD 21Fairfax Financial Holdings
Investments – Majority Interests
Ownership Price Price Gain/Loss
Name (in millions) (09/30) (12/31) (in $ millions)
Dexterra 31.8 $5.06* $6.54* $47.1*
Fairfax India 51.7 $6.84 $9.60 $142.7
Helios Fairfax 36.9 $3.02 $5.25 $82.3
Recipe Unlimited 27.1 $9.87* $16.75* $146.6
Thomas Cook India 248.2 ₹27.85 ₹47.80 $67.7
Total $486.4
Per Share $18.53
* in CAD 22Fairfax Financial Holdings
Investments – Fixed Income Portfolio
September 30, 2020
Due in 1 year or less 5,418.3
91%
Due after 1 year through 5 years 10,025.2
Due after 5 year through 10 years 1,016.4
Due after 10 years 504.3
16,964.20
23Fairfax Financial Holdings
Strategic Monetization Program
• Davos Brands sale to Diageo
• Riverstone Europe sale to CVC
• Easton Baseball sale to Rawlings
24Fairfax Financial Holdings
Investments - Summary
• The fixed income portfolio has a short duration
• Equity Investment Portfolio is much improved
• Majority Investment prices are much improved
• Strategic Monetization of Private Investments is ongoing
25Fairfax Financial Holdings
Financial Position – September 30, 2020
Consolidated Adjusted
Holding company cash and investments
(net of short sale and derivative obligations) 1,095.9 1095.9
Borrowing – holding company 5,440.7 5,440.7
Borrowing – insurance and reinsurance companies 1,076.0 1,076.0
Borrowing – non-insurance companies 2,132.9 –
Total debt 8,649.6 6,516.7
Net debt 7,553.7 5,420.8
Common shareholders’ equity 11,600.8 11,600.8
Preferred stock 1,335.5 1,335.5
Non-controlling interests 3,450.1 1,389.5
Total equity 16,386.4 14,325.8
Net debt/total equity 46.1% 37.8%
Net debt/net total capital 31.6% 27.5%
Total deb/total capital 34.5% 31.3%
26Fairfax Financial Holdings
Does it possess superior business economics
• Superior long term growth in book value/share
• Profitable insurance underwriting
• Consistent Float Generation
• Conservative Reserving
• Excellent Long Term investment portfolio performance
• Strong Financial Position
27Fairfax Financial Holdings
Does it have honest and
capable management?
28Fairfax Financial Holdings
• Prem Watsa currently owns 1,542,880 Fairfax common shares
• Prem Watsa personally purchased an additional 482,600
shares in June for $149 million
• Annual compensation for Prem Watsa fixed at $600,000 with
no options or bonuses
• Fairfax capital allocation program includes an active share
repurchase program (2,068,409 shares since Q4/17)
• Excellent board of directors
• Fairfax Guiding Principles are a unique part of the corporate
culture
29Fairfax Financial Holdings
Does it have honest and capable management
• “Skin in the Game”
• Reasonable compensation practices
• Capital allocation record/Share repurchases
• Unique corporate culture
30Fairfax Financial Holdings
Can it be purchased at an
attractive price?
31Fairfax Financial Holdings
Current Price $340.94
2020 Price Return -27.96%
Book Value/Share $442.17
Price/Book Value 0.77 X
Peer Group 1.29 X
Dividend Yield 2.9%
32Fairfax Financial Holdings
What if?
33Fairfax Financial Holdings
What if?
Valuation Return *
• Fairfax trades at current book
value/share 29.7%
• Fairfax trades at current peer group book
value/share multiple 67.3%
• Fairfax grows book value/share by 15% and
trades at book value/share 49.2%
• Fairfax grows book value/share by 15% and
trades at peer group book value/share multiple 92.4%
* without dividends 34Fairfax Financial Holdings
What if?
• Current Market Price $341
• Current Book Value Per Share $442
• Annual Compounded Growth Rate 15%
• Book Value Per Share in 5 Years $899
• Market Price/Book Value Multiple 1.29 x
• Market Price in 5 Years $1,147
• Annual Compounded Rate of Return 27.5%
35Fairfax Financial Holdings
What if?
$100 + EPS
36Fairfax Financial Holdings
Summary
Great Business
Great People
Great Price
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