MKL - Markel Corp

[chrispy]

Without the acquisition and tax act, markel ventures did not do to well in 2017

[racemize]

Without the acquisition and tax act, markel ventures did not do to well in 2017

 

They've said that the results from last year were cyclically high, so I think it makes sense from that point of view.

[Txvestor]

What is your valuation of MKL ventures? After the addition of Costa farms, and given current market valuations, quality of their businesses, and with their current growth rates. I would say that 15x EBITDA multiple is probably reasonable. I think once costa gets incorporated into the accounting fully in the next 1-2Qs, an annual $200M run rate EBITDA is possible, so $3B perhaps?

Gaynor said a few interesting things on the Q call. The company overall is roughly 30% larger over 2017 and they actually did that while slightly reducimg the outstanding share count.

He is also confident that they will keep finding such valie accretive MKL Ventures and insurance acquisitions. I think one would find it hard to argue with their recent acquisition track record and they sure were busy in 2017.

As an example of MKL ventures high octane fueled growth, he mentioned these data points.

2012 Rev:489m EBITDA 60m

2017 Rev:1.2B  EBITDA 178m

All while hundreds of millions of cash flow was sent up to the mothership holdco as dividends.

 

[wolverine890]

What is your valuation of MKL ventures?

 

Personally, I look at MV as a type of call option. I don't think it is currently worth much to shareholders of the insurance company as net income is barely keeping up with amortization, net interest and deprecation (Think about it this way, had Gayner used this capital to purchase public equities would shareholders have a higher or lower book value? Most likely higher). In order for MV to work, we need to see higher growth rates from current companies or net income that is resistant to the business cyclical with longevity; the latter is their strategy. Berkshire paid a premium (higher amortization/deprecation vs growth) for See's but BRK's competitive advantage is longevity. See's is still producing net income for BRK long after they amortized their premium purchase price. Will Costa Farms be around in 20 years selling flowers to the entire east cost? Will Florida continue to attract retirees who want to garden so that the population grows at a disproportionate rate to the rest of the country? How will Costa Farms respond to climate change? If Costa Farms is around in 20 years will be a success! If not, let's hope another one of the investment works out to offset the bad ones.

 

But maybe i am missing something.

[voyager]

Markel Ventures has some real value.

 

The group of food equipment businesses are good ones, albeit without a ton of reinvestment opportunity or growth.  There is a nice moat and amount of durability if you read about the industry, such as ITW and Welbilt. 

 

Costa Farms is a very good business that has a ton of reinvestment ability.  If people stop planting flowers in the next 20 years, it probably means that a lot of the investments people are making now aren't going work out to well either. 

 

The other businesses are mostly average, with health care being tough. 

 

What is your valuation of MKL ventures?

 

Personally, I look at MV as a type of call option. I don't think it is currently worth much to shareholders of the insurance company as net income is barely keeping up with amortization, net interest and deprecation (This about it this way, had Gayner used this capital to purchase public equities would shareholders have a higher or lower book value? Most likely higher). In order for MV to work, we need to see higher growth rates from current companies or net income that is resistant to the business cyclical with longevity; the latter is their strategy. Berkshire paid a premium (higher amortization/deprecation vs growth) for See's but BRK's competitive advantage is longevity. See's is still producing net income for BRK long after they amortized their premium purchase price. Will Costa Farms be around in 20 years selling flowers to the entire east cost? Will Florida continue to attract retirees who want to garden so that the population grows at a disproportionate rate to the rest of the country? How will Costa Farms respond to climate change? If Costa Farms is around in 20 years will be a success! If not, let's hope another one of the investment works out to offset the bad ones.

 

But maybe i am missing something.

[nickenumbers]

Guys,

 

I don't know much of anything about Markel.  I understands that they are somewhat following the BRK path, and they are at a much smaller scale, so they are more nimble and they can consider opportunities that would be too small for BRK.

 

I also understand that they have a good historical return.

 

With that, I can't get over a current PE of 44.

 

Other then the basic arithmetic to derive the PE, I get that, what is the narrative to justify the PE?

I get that someone thinks that their future growth is going to out pace their EPS, but a 44..

What am I missing?

 

 

I am going to pass on it and move my attention elsewhere, but I wanted to learn a little bit more about Markel before I hit the road on them.

[ScottHall]

Comprehensive income. EPS has historically not captured increases in the value of the company's investments, but that is changing b/c of the new accounting rules. BVPS and long term growth in that number was more important than P/E for Markel b/c Markel's "earnings" didn't account for a major component of shareholder value.

 

http://www.markelcorp.com/About-Markel/NewsRoom/Reuters2330770

[Liberty]

Existing thread:

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/mkl-markel-corp/

 

I suggest you read Buffett's letters to become more familiar with insurance companies. They are generally not valued on P/E.

[StevieV]

I agree that it is best not to value MKL on a PE basis.

 

In my view, MKL is a bit expensive here.  The factors that allowed them to grow book value so quickly in the early years are not as prevalent today.  Three main things:  (1) bond yields are lower (even though they have moved up a bit); (2) equity valuations are high; and (3) the percentage of float is lower, creating lower investing leverage.

 

I don't think anyone should expect anything similar to their historical returns.  My problem with MKL here is the price/book is somewhat high, and the return a little uncertain, if you are looking at high single to low double digit returns.

 

[chrispy]

MKL is going to grow book value slowly until either there is a market downturn or yields increase substantially. Both would cause MKL share price to fall beforehand.  We can all purchase MKL at a better price (and probably should)

[racemize]

I agree that it is best not to value MKL on a PE basis.

 

In my view, MKL is a bit expensive here.  The factors that allowed them to grow book value so quickly in the early years are not as prevalent today.  Three main things:  (1) bond yields are lower (even though they have moved up a bit); (2) equity valuations are high; and (3) the percentage of float is lower, creating lower investing leverage.

 

I don't think anyone should expect anything similar to their historical returns.  My problem with MKL here is the price/book is somewhat high, and the return a little uncertain, if you are looking at high single to low double digit returns.

 

We made the same arguments several years ago, and they still pulled off decent underlying returns.

[StevieV]

I still think the analysis is valid.

 

They used to do 20% BVPS growth.  Now they are around 10%, depending on what time frame you want to use.  I think the 10% is going to get more difficult at today's equity prices.  Rates will also have short term hit on book.

 

I believe that MKL has mentioned 9 or 10% being pretty good going forward from here.  1.7 book is, IMHO, expensive for 9-10% BVPS growth.

 

When I first bought MKL, I figured I would get at least book value growth, and probably some multiple expansion at some point.  Now, I think the risk is the other way.  I think there is risk the multiple could contract.  I tend to think that book growth is the most you'll get, and there is risk that you'll get less.  So, risk on the 9-10% not being hit and then risk on the multiple.

 

I really like MKL as a company.  I just don't like the price here.

[StevieV]

I agree that it is best not to value MKL on a PE basis.

 

In my view, MKL is a bit expensive here.  The factors that allowed them to grow book value so quickly in the early years are not as prevalent today.  Three main things:  (1) bond yields are lower (even though they have moved up a bit); (2) equity valuations are high; and (3) the percentage of float is lower, creating lower investing leverage.

 

I don't think anyone should expect anything similar to their historical returns.  My problem with MKL here is the price/book is somewhat high, and the return a little uncertain, if you are looking at high single to low double digit returns.

 

We made the same arguments several years ago, and they still pulled off decent underlying returns.

 

 

Came across this thread on twitter discussing the new Markel bonus structure.  The comments mostly seem interested in whether the compensation is too high.  That's not what stands out to me.

 

I think the key point is, MKL now thinks that 8% BVPS growth/year is outperformance.  They believe 10% is big outperformance.  IMHO, 1.7 book is expensive for BVPS 8% growth.

 

[eclecticvalue]

I think this is happening among investment managers. Because they sense the returns will be lower in the future. So they think it is a good idea to move the goal posts.

[scorpioncapital]

Are these BVPS growth targets indexed to inflation? Is that 8% real growth or nominal. Huge difference if the environment changes.

[maxthetrade]

My opportunity cost is owning Berkshire, I think it's highly likely that Berkshire compounds at 8%+. To own MKL at todays price one would have to make a very good case that MKL can compound at a significantly higher rates which I think is unlikely. Don't get me wrong, I like MKL and owned it in the past but today is pretty expensive, so I sold and moved on. I'll be back at a lower valuation.

 

 

[netnet]

My opportunity cost is owning Berkshire, I think it's highly likely that Berkshire compounds at 8%+. To own MKL at todays price one would have to make a very good case that MKL can compound at a significantly higher rates which I think is unlikely. Don't get me wrong, I like MKL and owned it in the past but today is pretty expensive, so I sold and moved on. I'll be back at a lower valuation.

Excellent point here. How can Markel at 1.7 X BVPS be a better bet than BRK sub 1.4X, given that BRK has much, much more earning power and liquidity?

[Jurgis]

My opportunity cost is owning Berkshire, I think it's highly likely that Berkshire compounds at 8%+. To own MKL at todays price one would have to make a very good case that MKL can compound at a significantly higher rates which I think is unlikely. Don't get me wrong, I like MKL and owned it in the past but today is pretty expensive, so I sold and moved on. I'll be back at a lower valuation.

Excellent point here. How can Markel at 1.7 X BVPS be a better bet than BRK sub 1.4X, given that BRK has much, much more earning power and liquidity?

 

BRK is much larger than MKL which comes with its own set of issues. And BRK has a huge key man problem that is getting worse with every year.

 

I'm not saying I prefer MKL at current prices. But it's not as clear cut as you say. ;)

[netnet]

BRK is much larger than MKL true which comes with its own set of issues. And BRK has a huge key man men problem true that is getting worse with every year.

 

I'm not saying I prefer MKL at current prices. But it's not as clear cut as you say. ;)

But BRK has a deeper bench ,by far, and more momentum in the operating subs and it's cheaper.

[John Hjorth]

Leaving succession issues aside, to me, comparing Berkshire with Markel has been for now many years like comparing apples to oranges. Markel is still basically an insurance company [Markel Ventures does not matter much], while Berkshire has become a full blown conglomerate.

[voyager]

Leaving succession issues aside, to me, comparing Berkshire with Markel has been for now many years like comparing apples to oranges. Markel is still basically an insurance company [Markel Ventures does not matter much], while Berkshire has become a full blown conglomerate.

 

That's very accurate... Markel Ventures is worth something in the ball park of $1.5B probably.... Only about 10% of the EV.  It's not insignificant, although it won't move the needle a whole lot for the time being. 

 

In the long run, it's likely that ventures will become larger and larger as Markel reinvests more of their capital into markel ventures acquisitions.   

[Crip1]

After several messages of MKL being a good, but over-valued, company, it opens 2.5% higher this morning?

 

 

I've got a list of companies that I'd like you all to comment upon in similar fashion this morning, if you're not too busy.

 

 

-Crip

[maxthetrade]

Leaving succession issues aside, to me, comparing Berkshire with Markel has been for now many years like comparing apples to oranges. Markel is still basically an insurance company [Markel Ventures does not matter much], while Berkshire has become a full blown conglomerate.

 

I have no preference with regards to my financial diet, if apples are cheaper I'll buy apples and if oranges are cheaper it's oranges on the plate  ;D

 

It's true that Markels' portfolio is a lot smaller but it doesn't show up in the performance. Gayner once said that if you look in the mirror and don't see Warren Buffett then don't invest like him and that's what he's prudently doing and it's showing up in the results.

Further I'm not convinced that Markel Ventures will be a great success, there is so much competition out there even for small companies. One simply can not compare MKL to a smaller Berkshire of the past, times are very different. 

 

[StevieV]

After several messages of MKL being a good, but over-valued, company, it opens 2.5% higher this morning?

 

 

I've got a list of companies that I'd like you all to comment upon in similar fashion this morning, if you're not too busy.

 

 

-Crip

 

I would be happy to help, but I am afraid that you misunderstand the source of MKL's outperformance this morning.  I exited the last of MKL position last week, due to the "good, but over-valued" opinion I expressed upthread.  Unfortunately, I am quite sure my exit, not mere posts, is what moved the stock.

[CorpRaider]

A couple of thoughts spring to mind:

 

1) 105% combined ratio

 

2) Hurdle for comp was raised in 2009, right?