Fairfax India - questionable results?

I just saw this article about Fairfax India: https://www.fool.ca/2017/09/05/future-tfsa-millionaires-1-hi….

I’d never heard of the company before but I own one share of Fairfax Financial (more out of curiosity than conviction).

When I looked at the financial statements it seems that the earnings are actually unrealized gains on stock holdings. And the increase in book value is likely the same. This seems really bad because the share price will typically be a lot higher than the earnings or book value – so when you compare this to other businesses you would have to multiply valuation metrics like P/E or P/B by anywhere from 2x - 14x. The real P/E ratio would be more like 70, not 5.

Has anyone else looked at this? Is there any truth to the article?

P/B for Fairfax has always been around 1.1 to 1.2 I believe. Now, Fairfax India is growing its book value faster than Fairfax (the mothership) so book P/B could be a little bit higher but I would not buy at anything over 1.3.

I’m not sure that comparison is even possible here. If a regular company builds a factory for $300m one year, they won’t report that it’s worth $500m the next year just because their stock price went up. As far as I can tell this appears to be what Fairfax India is doing. That would make the typical ratios meaningless because they’re based on inflated (and much more volatile) numbers.

As far as I can tell this appears to be what Fairfax India is doing. That would make the typical ratios meaningless because they’re based on inflated (and much more volatile) numbers.

Fairfax India is a holding company to hold various equity investments in India. Somewhat similar to Fairfax or Berkshire, except it doesn’t have any insurance subsidiary. I think Both Berkshire and FFH uses similar to book value calculation methods. No one is questioning them. I think they are showing the investment value and fair value, so not sure what is the concern here.

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It looks like Berkshire’s reports show investment results that make up about half of their net earnings and book value so it’s not too different.

All the same I can’t quite make the leap to saying that a 5x P/E is a bargain when those earnings are just the results of 2 stocks doing well last year, or that buying a portfolio of 10 stocks for 30% more than the prices of the individual stocks is a good idea. It also seems to pay out large advisory / performance fees that reduce the gains.

The parent company looks like a better way to hold Fairfax India (which it does) since it can at least leverage things like its large insurance float to boost results (the shares are currently around $500 and the investments per share at the end of last year were $1230) and it’s a lot less dependent on a couple of small companies to drive results.

First of all you don’t use PE to value this stock hence the book value. As far as FFH vs this stock that’s a choice, there are reasons for owning this stock outside of FFH