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Here's Why You Should Buy First American Financial Stock

First American Financial Corporation FAF is well-placed to gain from high premiums, strategic buyouts and prudent capital deployment.

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

The stock has seen its estimates for 2020 and 2021 move up nearly 19.5% and 12.6%, respectively in the past 30 days, reflecting investor optimism.

The company delivered an earnings surprise in each of the last four reported quarters with the average beat being 20.84%. Its earnings per share have grown at a five-year (2015-2019) CAGR of 24%.

Factors Driving First American

This Zacks Rank #2 (Buy) title insurer continues to benefit from higher revenues driven by increased direct premiums and escrow fees, agent premiums, and net investment income. Revenues increased at a five-year (2014-2019) CAGR of 4.6%. The Zacks Consensus Estimate for the company’s 2020 and 2021 revenues is pegged at $6.42 billion and $6.47 billion, respectively, indicating an increase of 3.5% and 0.7% from the year-ago reported figure. We believe growth in mortgage origination activity and increase in domestic title orders closed by the company’s direct title operations are likely to drive revenues in the days ahead. Strong revenues have contributed to the company’s margin expansion as well.

Purchase activity declined as stay-at-home orders were issued due to the COVID-19 pandemic. However, due to the strong market fundamentals, which include lower mortgage rates and moderate home price appreciation, the company expects improvement in purchase activity in the near term.

Moreover, the company continues to undertake strategic acquisitions to reinforce its core business and expand its valuation and data businesses. In March 2020, it acquired Docutech, which reflected its commitment to grow its core business and its dedication to improve the home-buying experience and drive digital transformation of the real estate settlement process. Information and other revenues increased in the first half of 2020 driven by new acquisitions. The company remains focused on making acquisitions in order to meet its risk-adjusted return target.

First American remains focused on growing its core title and settlement business while maintaining profitable market share, developing value-added services that reinforce customer relationships, providing banking services to agents to improve their risk profile and improve returns, expanding coverage of property data elements and geographies, investing in long-term growth in Canada, Europe, and Australia, growing home warranty business as well as looking for new opportunities where it has strategic advantage.

Furthermore, investors should be impressed by its disciplined capital management. The company has increased its dividend at a seven-year (2014-2020) CAGR of 24.2%. Its current dividend yield of 3.5% is higher than the industry average of 0.5%, which makes the stock an attractive pick for yield-seeking investors. First American aims 54% payout ratio in 2020, given its cash flow generation capabilities and investment opportunities. It has $96 million remaining under its share repurchase authorization.

Return on equity (ROE), reflecting the company’s efficient utilization of its shareholders’ funds to generate earnings, has been increasing over the past several years. Its trailing twelve months ROE of 14.3% betters the industry average of 6.2%. The company aims 12-14% return on equity over the long term.

Further, the company’s solvency position looks strong. Its cash and cash equivalents of $1.5 billion as of Jun 30, 2020 are sufficient to meet debt obligations. Its debt level was $1 billion as of Jun 30, 2020. Also, total debt to capital of 18.1% compares favorably with the industry’s measure of 21.3%.  As of Jun 30, 2020, the company had $700 million available on its revolving credit facility.  Further, it expects debt-to-capital ratio in the range of 18%-20%.

First American’s times interest earned, a measure to identify the company ability to service debt, of 17.8 is good when compared with the industry’s average of 8.5, implying that its earnings are sufficient to cover interest obligations.

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

However, shares of First American have lost 12.8% year to date, compared with the industry’s decline of 10.8%. Nevertheless, strong fundamentals such as growing direct premiums, escrow fees and agent premiums as well as effective capital deployment should help shares bounce back.

Other Stocks to Consider

Investors interested in property and casualty industry may also look at Donegal Group Incorporation DGICA, Fidelity National Financial Inc., FNF and The Allstate Corporation ALL, each carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Donegal provides personal and commercial lines of property and casualty insurance to businesses and individuals. The company beat estimates in each of the last four quarters, with the average surprise being 86.44%.

Fidelity National provides various insurance products in the United States and offers title insurance, escrow, other title related services and home warranty insurance. It surpassed estimates in each of the last four quarters, with the average surprise being 32.13%.

Allstate provides property and casualty, and other insurance products in the United States and Canada. It surpassed estimates in each of the last four quarters, with the average surprise being 25.24%.

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