First American Financial Corporation FAF has been in investors’ good books on the back of strategic acquisitions, solid segment performance, higher return on equity and prudent capital deployment.
The company has a decent earnings surprise history. The company beat estimates in each of the last four quarters with the average positive surprise being 18.47%.
First American’s trailing 12-month return on equity of 16.1% is higher than the industry’s 6.4%. This highlights the company’s efficient utilization of its shareholders’ funds to generate earnings.
The stock has a VGM Score of B. VGM Score helps to identify stocks with the most attractive value, best growth and the most promising momentum.
First American’s top line has been witnessing a positive trend over the years on the back of strong direct premiums and escrow fees, higher agent premiums, net investment income and information and other revenues. The metric witnessed CAGR of 5.8% over the last five years (2014-2019). Notably, the Zacks Consensus Estimate for the company’s 2021 revenues is pegged at $6.35 billion, indicating an increase of 8.9% from the year-ago reported figure. Growth in mortgage origination activity, increase in domestic title orders closed by the company’s direct title operations, and domestic average revenues per order closed are expected to drive revenues in the near term.
Net investment income continues to be one of the important drivers of the company’s top-line and has been exhibiting improvement over the last several years. The metric witnessed four-year CAGR (2015-2019) of 33.1%. Despite the current low interest rate environment, higher average balances owing to strength in the company’s commercial business and short-term interest rates will continue to drive net investment income.
Also, the company continues to benefit from solid performance of the title insurance and services segment. Revenues at this segment grew at a four-year CAGR (2015-2019) of 4.1%. Also, in the first quarter of 2020, total revenues increased 11% year over year to $1.3 billion. Sale and refinancing of residential and commercial real estate and rising net investment income over the past several years are expected to drive the momentum going forward.
Moreover, First American remains focused on expanding its valuation and data businesses with a number of strategic acquisitions. In first-quarter 2020, it acquired Docutech to boost the home-buying experience for consumers and driving digital transformation of the real estate settlement process. The company remains focused on making acquisitions in order to meet its risk-adjusted return target.
Further, the company’s current debt level has remained stable over the past few years. The company’s cash and cash equivalents of $1 billion as of Mar 31, 2020 are sufficient for the company to meet its debt obligations, which increased 16.3% from the 2019-end level to $847 million as of Mar 31, 2020. Also, total debt to capital of 16.2% compares favorably with the industry’s measure of 21.8%.
First American’s times interest earned, a measure to identify the company ability to service debt, of 18.4 is good when compared with the industry’s average of 4.2, implying that its earnings are sufficient to cover interest obligations.
Also, by virtue of its solid capital position, the company is able to return value to shareholders via dividend hikes and share buybacks. Its dividend has witnessed a six-year CAGR (2014-2020) of 24.2% and currently yields 3.7%, which compares favorably with the industry average of 0.5%. In the first quarter of 2020, the company bought back 1.7 million shares worth $65.8 million. Such shareholder friendly moves reflect the company’s strong liquidity position and make the stock attractive for yield-seeking investors.
However, the company has been witnessing high costs due to rise in personnel costs, premiums retained by agents, other operating expenses, provision for policy losses and other claims, premium taxes and interest. Such costs tend to weigh on the company’s margins. Notably, in the first quarter, net margin contracted 90 basis points (bps) sequentially.
Shares of this Zacks Rank #3 (Hold) property and casualty insurance have lost 11.7% in the past year, compared with the industry’s decline of 17.4%. Moreover, the company’s policy of ramping up growth and capital position should continue to drive share price higher.
Stocks to Consider
Some better-ranked stocks from the insurance industry include Fidelity National Financial Inc. FNF, Kemper Corporation KMPR and EverQuote, Inc. EVER. While Fidelity National sports a Zacks Rank #1 (Strong Buy), Kemper and EverQuote carry a Zacks Rank #2 (Buy) You can see the complete list of today’s Zacks #1 Rank stocks here.
Fidelity National Financial provides various insurance products in the United States. It surpassed estimates in each of the last four quarters, with the average positive surprise being 21.13%.
EverQuote operates an online marketplace for insurance shopping in the United States. It surpassed estimates in each of the last four quarters, with the average positive surprise being 86.67%.
Kemper provides property and casualty, and life and health insurance in the United States. It surpassed estimates in each of the last four quarters, with the average positive surprise being 16.25%.
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First American Financial Corporation (FAF) : Free Stock Analysis Report
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