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First American Financial (FAF) Up 17.1% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for First American Financial (FAF). Shares have added about 17.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is First American Financial due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

First American Financial Q1 Earnings Beat, Improve Y/Y

First American Financial reported first-quarter 2020 operating income per share of $1.06, which surpassed the Zacks Consensus Estimate by 10.4%. Moreover, the bottom line improved 43.2% year over year.

The company’s results reflect strong performance at its Title Insurance and Services segment, which was partially offset by increase in expenses.

Results in Details

Operating revenues of $1.4 billion increased 8.4% year over year. The improvement came on the back of strong direct premiums and escrow fees, and higher agent premiums. However, the top line missed the Zacks Consensus Estimate by 4.9%.

Net investment income declined 44.2% to $45.9 million.

Closed title orders increased 34%, which can be attributed to 144% increase in refinance orders.

Average revenue per order decreased 6%, driven by the shift to refinance transactions.

Total expense of $1.3 billion increased 15.4% year over year, primarily due to rise in personnel costs, premiums retained by agents, other operating expenses, provision for policy losses and other claims, premium taxes and interest.

Segment Results

Title Insurance and Services: Total revenues increased nearly 11% year over year to $1.3 billion. The upside came on the back of improved premiums and escrow fees, which can be primarily attributed to higher number of direct title orders closed. However, pre-tax margin contracted 650 bps year over year to 5.6%.

Direct open orders increased 55.6% year over year to 354,400 while direct closed orders improved 34.3% to 202,700 year over year.

Specialty Insurance: Total revenues remained flat year over year at $122 million. Strong property and casualty (P&C) and home warranty business have contributed to the segment’s top line. However, pre-tax margin contracted 410 bps year over year to 10.5%.

Share Repurchase Update

In the first quarter, the company bought back 1.7 million shares worth $65.8 million. Such shareholder friendly moves reflect the company’s strong liquidity position.

Financial Update

First American Financial exited first-quarter 2020 with cash and cash equivalents of $1.1 billion, down 29.3% from Dec 31, 2019-level. Notes and contracts payable were $847 million, up 16.3% from 2019-end level.

As of Mar 31, 2020, the company had stockholders’ equity of $4.4 billion, down 1.4% from Dec 31, 2019-end level.

2020 Outlook

The interest rate cut by the Federal Reserve in the United States is likely to keep investment yields under pressure.

For its Title Insurance and Services segment, First American Financial expects investment income in the range of $40-$45 million for each remaining quarter of 2020. This segment’s pretax margin is estimated between 9% and 11% in 2020.

Q2 Guidance

The company’s open purchase orders are expected to witness a year-over-year decline of 45% in second-quarter 2020. Moreover, revenues from the company’s commercial business are also estimated to decline 50% year over year in the second quarter.

 

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

At this time, First American Financial has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise First American Financial has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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