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First American (FAF) Banks on Strong Revenues & Cash Flows

·5 min read

First American Financial Corporation FAF has been favored by investors on the back of its higher direct premium and escrow fees, growing revenues in the home warranty business and strategic acquisitions.

Growth Projections

The Zacks Consensus Estimate for 2021 earnings per share is pegged at $6.54, indicating year-over-year increase of 20%.

Estimate Revision

The Zacks Consensus Estimate for 2021 and 2022 has moved 5.6% and 1.3% north, respectively in the past 30 days. This should instill investors' confidence in the stock.

Earnings Surprise History

First American has a decent earnings surprise history. It beat estimates in three of the last four quarters and missed in one, with the average being 20.03%.

Zacks Rank & Price Performance

First American currently carries a Zacks Rank #2 (Buy). The stock has rallied 24.6%, outperforming the industry’s increase of 20.3% year to date.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Return on Equity (ROE)

Further, the company’s trailing 12-month return on equity (ROE) of 14.3% reflects its growth potential. It compares favorably with the industry average of 5.6%. ROE reflects its efficiency in using its shareholders’ funds.

Style Score

It has an impressive Value Score of A, which reflects an attractive valuation of the stock.

The company has a favorable VGM Score of A. VGM Score helps to identify stocks with the most attractive value, best growth and the most promising momentum.

Back-tested results show that stocks with a Style Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2 offer the best investment opportunities.

Business Tailwinds

The title insurer has been experiencing consistent revenue growth over the past several years on the back of solid performance across its Title Insurance and Services and Specialty Insurance segments.

The Title Insurance and Services business, which accounts for a lion’s share of the insurer’s revenues, is expected to gain momentum from improved direct premium and escrow fees from favorable refinance, purchase and commercial transactions, increased agent premiums, increase in number of closed orders, and increase in average revenue per order as well as higher information and other revenues.

Higher operating revenues in the home warranty business and higher net realized investment gains in both the home warranty and property and casualty businesses should drive the Specialty Insurance business.

Also, the company remains focused on acquisitions to enhance its core business and expand its valuation and data businesses. In October 2020, it inked a deal to acquire ServiceMac whose mortgage subservicing business is likely to enable First American Financial to provide enhanced end-to-end mortgage, settlement, post-closing services and servicing-related products and solutions.

Owing to the impact of the Docutech acquisition in March 2020, information and other revenues surged 32% year over year in the first quarter.

Moreover, First American boasts a healthy balance sheet along with an impressive solvency level, which implies that its cash reserves are sufficient to meet debt obligations. Its total debt to capital of 16.8% compares favorably with the industry’s average of 20.1%. In the first quarter of 2021 its operating cash flow surged more than nine-fold year over year. It exited the quarter with cash of $2 billion.

Based on a robust capital position, it hiked dividend at a seven-year (2014-2021) CAGR of 21.2%. Its current dividend yield of 2.9% is better than the industry average of 0.4%, which makes the stock an attractive pick for yield-seeking investors.

Other Stocks to Consider

Some other top-ranked stocks from the property and casualty insurance sector are Selective Insurance Group, Inc. SIGI, HCI Group, Inc. HCI and Alleghany Corporation Y. While Selective Insurance and HCI Group sport a Zacks Rank #1 (Strong Buy), Alleghany carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Selective Insurance surpassed estimates in three of the last four quarters and missed in the other one, the average earnings surprise being 35.12%.

The bottom line of HCI Group surpassed estimates in three of the last four quarters, the average being 42.91%.

Alleghany’s earnings surpassed estimates in each of the last four quarters, the average being 128.63%.

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First American Financial Corporation (FAF) : Free Stock Analysis Report

Selective Insurance Group, Inc. (SIGI) : Free Stock Analysis Report

HCI Group, Inc. (HCI) : Free Stock Analysis Report

Alleghany Corporation (Y) : Free Stock Analysis Report

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Zacks Investment Research