Scotia Capital Raise Target Scotia Capital analyst Phil Hardie sees “attractive opportunities” for investors to buy shares of Fairfax Financial Holdings Ltd. “given their discounted valuation that does not likely reflect the company’s underlying earnings power.”
“We believe the stock should garner a sustainable re-rate on the back of the organic expansion of its insurance operations that likely enhance its ROE [return on equity] and growth rate potential of its book value, and potentially add greater consistency to both metrics,” he added.
In a research note released Tuesday, Mr. Hardie called Fairfax “a much simpler story than in the past” and said he thinks investors have “yet to fully appreciate a number of the changes in its business, and the likely implications for future stock performance.”
“Given the historical complexity of its operations and disclosures, we believe many investors have struggled with gaining a deep appreciation for and ability to quantify the key factors that drive Fairfax earnings and how they have evolved,” he said. “In fact, the company has historically been viewed as one of the most confusing investments in the financial services sector, which limited investor appetite and interest in the stock. Fairfax is now a much simpler story than in the past, its financial disclosures have improved, and we commend its CFO Jennifer Allen and her team for continuing to advance this initiative. Nonetheless, we believe the majority of investors have yet to recognize the changes in Fairfax business and their likely implications for its future stock performance. We see the higher growth at a potentially more consistent pace. The sustained steep valuation discount relative to its peers, over the past two to three years, suggests to us that this has yet to be reflected in the stock price.”
Mr. Hardie raised his target for Fairfax Financial shares to $950, exceeding the $936.38 average on the Street, from $860 with a “sector outperform” recommendation.
“We continue to believe Fairfax is well-positioned for a rising interest rate environment, and, given its value investing approach, it has the potential to continue to generate outsized investment returns – even against a backdrop of more modest equity market returns,” he said. “Further, we believe its increased underwriting leverage and favourable operating environment for its insurance operations add a greater lever for growth than in the past.”