I really appreciate your work here. I put a meaningful chunk of our portfolio in HHH after the Vantage deal closed and the future path to compounding became obvious. You and Alexander have both independently led credence to how I was seeing it unfold.
Yeah I’ve effectively merged HHC and HHH for the holdco. Hence referring to both debt and preferred as holdco, and including the Pershing fixed fee with HHC G&A.
Pete, of course, accepting Residual Value implies price per acre growth. Ditto for any other rationed resource like Buffett’s or Musk’s wealth, or many assets on the balance sheet that cannot be sold at once for various reasons. Land is inventory for the MPC business. How would you value inventory as an asset when historic cost has nothing to do with reality? My position is that even though Residual Value is imperfect, it is better than any attempt to discount future cash flows with rather arbitrary assumptions.
To be clear, I linked your article because I wanted people to see your thinking. I don’t entirely agree with it, but I understand the logic.
If I was to push back, I’d say this: all DCFs are based on assumptions. I’m not sure the MPC assumptions are any more arbitrary than those in other long term DCFs; they might even be less so. And the flaw with Residual Value it rests on an assumption we *know* is wrong: the acres can’t all be sold at that price today.
What gives me comfort is that both methods come out at roughly the same answer, because the likely rate of price growth is similar.
That’s an aggressive valuation for Vantage IMHO. I can buy FFH.TO at 1.2x book with a demonstrable insurance track record. I think an assumption they will compound book at 15% pa over 4 years is also aggressive - as you say in a softer market. I’m also reminded that gun fund managers experiences with their own insurers are pretty…………dreadful (Einhorn, Loeb)
You can indeed buy FFH at 1.2x and it’s my biggest position for that reason - it ought to trade higher. Don’t miss the fact that I value Vantage at 1x *today*.
15% might be aggressive - but look at where the equity is invested. I would not be at all surprised to see those companies compound at that rate, with insurance profits on top. Guaranteed? No. But unreasonable? I don’t think so.
Absolutely agree about prior fund managers and insurance - with a few notable exceptions like Warren Buffett and Prem Watsa. I think Ackman has studied what went right with those examples quite closely and copied the structure. That’s why Grandisson is happy to be on board. For example, Ackman doesn't earn a fee on the Vantage capital he manages; he earns a fee on the HHH share price. That's a very different incentive.
That said, all your comments are fair. That’s why I said this isn’t a conservative valuation. But it allows for a 26% cagr. I can accept that trade-off.
Pete, preferreds at the Holdco, a liability, have already added about 12% per my calculation because of additional cash injection into Vantage. Loeb and Einhorn were incentivized by asset management fees, while Ackman - by share price mostly, not comparable. Have you accounted for Teravalis?
Teravalis is included in HHH’s after tax residual value, but at book value (i.e. what they paid) , because it’s immature and there’s effectively no clear pricing data. So yes, it’s in there.
I really appreciate your work here. I put a meaningful chunk of our portfolio in HHH after the Vantage deal closed and the future path to compounding became obvious. You and Alexander have both independently led credence to how I was seeing it unfold.
Let’s hope we are all correct!
I also do not understand $700M cash at the Holdco level. Are you combining it with HHC cash?
Yeah I’ve effectively merged HHC and HHH for the holdco. Hence referring to both debt and preferred as holdco, and including the Pershing fixed fee with HHC G&A.
Pete, of course, accepting Residual Value implies price per acre growth. Ditto for any other rationed resource like Buffett’s or Musk’s wealth, or many assets on the balance sheet that cannot be sold at once for various reasons. Land is inventory for the MPC business. How would you value inventory as an asset when historic cost has nothing to do with reality? My position is that even though Residual Value is imperfect, it is better than any attempt to discount future cash flows with rather arbitrary assumptions.
To be clear, I linked your article because I wanted people to see your thinking. I don’t entirely agree with it, but I understand the logic.
If I was to push back, I’d say this: all DCFs are based on assumptions. I’m not sure the MPC assumptions are any more arbitrary than those in other long term DCFs; they might even be less so. And the flaw with Residual Value it rests on an assumption we *know* is wrong: the acres can’t all be sold at that price today.
What gives me comfort is that both methods come out at roughly the same answer, because the likely rate of price growth is similar.
That’s an aggressive valuation for Vantage IMHO. I can buy FFH.TO at 1.2x book with a demonstrable insurance track record. I think an assumption they will compound book at 15% pa over 4 years is also aggressive - as you say in a softer market. I’m also reminded that gun fund managers experiences with their own insurers are pretty…………dreadful (Einhorn, Loeb)
You can indeed buy FFH at 1.2x and it’s my biggest position for that reason - it ought to trade higher. Don’t miss the fact that I value Vantage at 1x *today*.
15% might be aggressive - but look at where the equity is invested. I would not be at all surprised to see those companies compound at that rate, with insurance profits on top. Guaranteed? No. But unreasonable? I don’t think so.
Absolutely agree about prior fund managers and insurance - with a few notable exceptions like Warren Buffett and Prem Watsa. I think Ackman has studied what went right with those examples quite closely and copied the structure. That’s why Grandisson is happy to be on board. For example, Ackman doesn't earn a fee on the Vantage capital he manages; he earns a fee on the HHH share price. That's a very different incentive.
That said, all your comments are fair. That’s why I said this isn’t a conservative valuation. But it allows for a 26% cagr. I can accept that trade-off.
Thanks for commenting!
Pleasure - nice piece BTW
Pete, preferreds at the Holdco, a liability, have already added about 12% per my calculation because of additional cash injection into Vantage. Loeb and Einhorn were incentivized by asset management fees, while Ackman - by share price mostly, not comparable. Have you accounted for Teravalis?
Teravalis is included in HHH’s after tax residual value, but at book value (i.e. what they paid) , because it’s immature and there’s effectively no clear pricing data. So yes, it’s in there.
Agree re incentives.
Not sure I follow re: the pref?
Thank you. Appreciate that.