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Here's Why First American Financial (FAF) is a Solid Bet

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·5 min read
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First American Financial Corporation FAF has been gaining momentum from its strategic buyouts, higher premium and escrow fees, effective capital deployment and sufficient liquidity.

The company is well poised for progress, as is evident from its favorable VGM Score of A. Here V stands for Value, G for Growth and M for Momentum, with the score being a weighted combination of all three factors.

The company beat earnings estimates in three of the last four quarters, with the average surprise being 15.86%.

First American has an impressive Value Score of A. Back-tested results show that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best opportunities in the value investing space.

Moreover, the company’s 13.4% return on equity (ROE) is better than the industry average of 5.6%, reflecting its efficiency in utilizing shareholders’ funds.

First American’s Title Insurance and Services segment, which accounted for a lion’s share of the insurer’s revenues in 2020, continues to gain from direct premium and escrow fees, increase in the number of closed orders, and increase in average revenue per order.

First American estimates investment income to be around $45 million per quarter with short-term rates at current levels. The metric witnessed a four-year CAGR (2016-2020) of 15.1%. Higher average balances owing to strength in the company’s commercial business and short-term interest rates are likely to fuel net investment income in the long term.

Moreover, this property and casualty insurer continues to focus on strategic acquisitions to reinforce its core business and expand its valuation and data businesses. In 2020, it spent nearly $400 million on acquisitions, the largest of which was Docutech. It has been a great addition to the insurer. Owing to the acquisition of Docutech, information and other revenues surged 28.6% year over year in 2020. Recently, 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. The company remains focused on making acquisitions in order to meet its risk-adjusted return target.

This Zacks Rank #2 (Buy) title insurer boasts a solid balance sheet with high liquidity and improving leverage. Its debt to capital of 17% betters the industry average of 20.6%. In addition, it continued to maintain a cash and cash equivalent position of $ 1.27 million.

Furthermore, its times interest earned, a measure to identify the company ability to service debt, of 17.1 is good compared with the industry’s average of 12.4, implying that its earnings are sufficient to cover interest obligations.

This title insurer raised its dividend at a six-year (2014-2020) CAGR of 24.2%. In 2020 it paid nearly $200 million in dividends and raised the dividend by 5% in both January and November. Further, in November 2020, its board approved a new share repurchase plan, which authorized the repurchase of up to $300.0 million of which $242 million remained as of Dec 31, 2020. Its current dividend yield of 3.5% is better than the industry average of 0.6%, which makes the stock an attractive pick for yield-seeking investors.

Over the past 30 days, the company’s 2021 earnings estimates have moved 8.3% north, reflecting investor optimism.

However, shares of First American have gained 1.8% year to date compared with the industry’s increase of 3.5%.

Nevertheless, the Zacks Consensus Estimate for 2021 and 2022 earnings per share is pegged at $5.49 and $6, indicating year-over-year increase of nearly 0.7% and 9.2%, respectively.

Other Stocks to Consider

Some other top-ranked stocks in the insurance space include Alleghany Y, Cincinnati Financial Corporation CINF and Arch Capital Group ACGL, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Alleghany’s bottom line surpassed estimates in two of the last four quarters (missed in the other two), the average beat being 34.08%.

Cincinnati Financial surpassed earnings estimates in two of the last four quarters, with the average surprise being 4.10%.

Arch Capital surpassed estimates in three of the last four quarters, with the average earnings surprise being 32.14%.

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Cincinnati Financial Corporation (CINF) : Free Stock Analysis Report

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

Arch Capital Group Ltd. (ACGL) : Free Stock Analysis Report

Alleghany Corporation (Y) : Free Stock Analysis Report

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