Watsa's Fairfax Sees Profits Wilt on Investment Losses
- By Sydnee Gatewood
Prem Watsa (Trades, Portfolio)'s Fairfax Financial Holdings (FFH.TO)(FRFHF) hosted a conference call to discuss its third-quarter results Friday morning. The results were released at market close Thursday.
Warning! GuruFocus has detected 2 Warning Sign with TSX:FFH. Click here to check it out.
The intrinsic value of TSX:FFH
The Toronto-based company said in its report that in response to the appreciation in equity market valuations and uncertainty in the economy, it has hedged its equity investment exposure. As of Sept. 30, equity hedges represented 112.7% of the company's equity and equity-related holdings.
"We are maintaining our defensive equity hedges and deflation protection as we remain concerned about the financial markets and the economic outlook in this global deflationary environment," Watsa said. "We continue to be soundly financed, with quarter-end cash and marketable securities in the holding company over $1.1 billion."
The company experienced steep losses on its investments, barely producing a profit. Fairfax recorded net investment losses of $199.5 million in the quarter, compared to a gain of $425.6 million in the same quarter a year ago.
Fairfax attributed the losses on investments to price fluctuations in stocks and Consumer Price Index-linked derivative contracts.
Third quarter net earnings attributable to shareholders dwindled to $1.3 million, marking a significant decrease from $424.8 million a year ago. Similarly, on a per share basis, the holding company reported a loss of 42 cents, compared with a profit of $18.16 last year.
Fairfax and Sagard Capital Partners entered an agreement on Monday to place a joint bid to acquire Performance Sports Group Ltd. (PSG.TO) for more than $575 million. The sports equipment manufacturer filed for bankruptcy protection on Oct. 31.
In addition, American International Group (AIG) announced it was going to sell some of its Latin American and European property-and-casualty insurance operations to Fairfax on Oct. 18.
Fairfax's top five holdings are, as of the second quarter, BlackBerry (BBRY), IBM (IBM), Kennedy-Wilson Holdings (KW), Resolute Forest Products (RFP) and Overstock.com (OSTK).
BlackBerry disclosed net loss of $372 million, or 71 cents per share, for the second fiscal quarter of 2017, reported on Sept. 28. Resolute Forest Products reported third-quarter revenue was down 1.9% on a year over year basis. Kennedy-Wilson reported a third quarter loss of $2.5 million. Overstock reported a loss of $3.1 million in the third quarter.
On the other hand, IBM reported third-quarter earnings of $2.85 billion, beating analysts' expectations. However, sales came in flat.
A native of India, Watsa immigrated to Canada in 1972 to attend the Richard Ivey School of Business at the University of Western Ontario, where he earned his MBA. Watsa bought Markel Financial for $5 million in 1985 and changed the name to Fairfax Financial. He grew the company to reach annual revenue of $8 billion in 2012. The financial holding company was listed on the New York Stock Exchange in 2002.
The DCF Calculator gives Fairfax a fair value of $310.99; it was trading at $508.7 on Friday.
Disclosure: I do not own stock in any companies mentioned in the article.
Start a free 7-day trial of Premium Membership to GuruFocus.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 2 Warning Sign with TSX:FFH. Click here to check it out.
The intrinsic value of TSX:FFH
