Fairfax Financial Holdings (TSX: FFH) is a Canadian holding company mainly involved in the insurance industry. It is involved in property and casualty insurance, the same kinds of insurance that Berkshire Hathaway offers. For this reason, the company’s chief executive officer Prem Watsa has often been called “Canada’s Warren Buffett.”
Whether Watsa is a Buffett-calibre leader remains to be seen. He has certainly delivered his investors a market-beating return over the last two decades, though recent years have been weaker.
In this article, I’ll explore several reasons why Fairfax Financial Holdings stock is an underestimated gem.
What Fairfax does
Fairfax is a property and casualty insurance company. This means that it insures properties and insures people against adverse events. Among its subsidiaries are
- Alltrust, a Chinese company involved in property and energy insurance;
- ARX, a Ukrainian life insurance company; and
- Pacific Insurance, a general insurance company that offers fire, medical, accident, and other types of insurance.
It’s a pretty diverse collection of companies with varying different types of insurance. Notably, the company is involved in both life insurance and property/casualty insurance. This is a good form of diversification as life and P&C have differing liquidity needs and thrive in different environments.
A legendary investment portfolio
One of the things FFH stock has going for it is its high-quality investment portfolio. The company diligently invests in high-quality stocks and has many well-regarded companies in its investment portfolio. These include
- Alphabet — better known as Google;
- Meta Platforms;
- Brookfield;
- Brookfield Asset Management;
- Berkshire Hathaway;
- And more.
These are all well regarded companies owned by intelligent people like Warren Buffett, Charlie Munger, Li Lu, and Mohnish Pabrai. So, Fairfax’s portfolio looks like it is a good one that should perform well over time and contribute to investors’ results.
FFH stock: Performance
Having looked at Fairfax’s business and investments, its time to turn to its financial performance.
In its most recent quarter, FFH did
- $3.9 billion in revenue, up 68%;
- $1.25 billion in earnings, up 112%;
- A 32.31% profit margin; and
- $1.9 billion in operating income, up 89%.
It was a pretty good showing. The long-term picture has been pretty good as well. Over the last 10 years, FFH stock has grown its fundamentals at the following compound annual growth rates:
- 13.26% in revenue
- 6.75% in operating income
- 10.10% in net income
- 8.65% in diluted earnings per share
That’s pretty good growth for a financial stock. And, FFH stock has a modest valuation, trading at
- 9.6 times earnings;
- 0.6 times sales; and
- 0.9 times book value.
This is a pretty cheap valuation for a stock that has delivered a solid track record over the last decade. Now, one thing to keep in mind is that Fairfax’s more recent results haven’t been as good as its longer-term track record. For example, earnings growth over the last five years has actually been negative. The company has, however, consistently grown on the top line.
Management has a lot of potential to deliver real value to shareholders. Prem Watsa’s long-term track record speaks for itself. Rising 1,000% over the last 20 years, FFH stock has outperformed the TSX. Let’s hope there are more gains to be had in the future.
