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FAIRFAX FINANCIAL HOLDINGS $364.55 (Toronto symbol FFH: SI Rating: Average) (416-367- 2612; www.fairfax.ca; Shares outstanding: 16.8 million; Market cap: $6.1 billion) is a financial-services holding company with assets of $27.9 billion. Fairfax engages in insurance, reinsurance and investment management. Prem Watsa is the company’s chairman and founder. Fairfax trades at a high price, but you can buy an odd lot of as few as 10 or so through any broker.
Reinsurers sell insurance to insurers. Fairfax does this through two subsidiaries: OdysseyRe and Group Re. Crum & Forster is Fairfax’s main U.S. insurance subsidiary, and Northbridge Financial is its principal subsidiary in Canada. It also sells insurance in Asia.
In the three months ended June 30, 2008, Fairfax’s earnings jumped to $275.4 million, or $15.65 a share, from $27.6 million, or $0.84. The latest quarter included $214.7 million of net gains on investments.
Fairfax’s insurance operations have remained consistently profitable. Insurance businesses tend to hold a lot of cash for investment. Since 2003, Fairfax has invested conservatively, offsetting stock and bond holdings with investments that rose when stock markets fell. These included short sales and credit-default swaps (insurance against defaults on bonds). Its biggest gains came last year.
Earlier this year, Fairfax lowered the percentage of its investments insured against stock-price drops from 100% to 65%. It also bought stocks trading at bargain prices as a result of the market downturn, including Wells Fargo and U.S. Bancorp. The chance of further gains on these investments adds to Fairfax’s appeal.
Fairfax Financial Holdings is buy.
BROADRIDGE FINANCIAL SOLUTIONS $20.23 (New York symbol BR: SI Rating: Extra Risk) (201-714 -3000; www.broadridge.com; Shares outstanding: 139.3 million; Market cap: $2.8 billion) serves the investment industry in three main areas: investor communications; securities processing; and transaction clearing, trade settlements and other back-office operations. Its clients include 250 banks, 500 mutual-fund families and 5,000 publicly listed companies.
Broadridge’s systems help its large and small clients cut their costs while it profits from the continuing drop in computer costs.
In the three months ended June 30, 2009, Broadridge’s revenue fell 7.1%, to $736.7 million from $792.4 million a year earlier. Earnings rose 19.5%, to $116.9 million, or $0.84 a share, from $97.8 million, or $0.70 a share. Increased sales of higher-profit services, lower interest expenses and favourable tax rates were the main factors behind the gain.
The company is dealing with the effect of the SEC’s “notice and access” rule, which lets firms post their annual reports and other investor documents on their web sites, instead of mailing them out. This has cut the revenue Broadridge gets for distributing these documents. However, it sells electronic-delivery services, and helps its clients comply with SEC regulations, so it stands to gain from this trend.
Broadridge will probably earn $1.50 a share in 2009, and the stock trades at 13.4 times that estimate. Thanks to its improving outlook, Broadridge has doubled its quarterly dividend to $0.14 a share from $0.07. The new annual rate of $0.56 yields 2.8%.
Broadridge is a buy.
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