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First American (FAF) Stock Surges 62% in a Year: Here's Why

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First American Financial Corporation (FAF - Free Report) stock is favored by investors, corroborated by its share price movement. Shares of the company have soared nearly 62% in a year, outperforming its industry's rally of roughly 18.5%. With a market capitalization of $6.7 billion, average volume of shares traded in the last three months were 0.7 million.



 

What’s Behind the Surge?

The company delivered a positive earnings surprise in the last four quarters with an average beat of 10.79%.

Improving revenues, cost control and effective capital deployment have helped the company deliver a solid 2017. The bottom line grew 22% year over year. The company generated pretax title margin was 12.1% (expanding 40 bps from 2016) and the return on equity came in at 13% (rose 110 bps from 2016).

First American Financial has been witnessing rising revenues with the top line having registered a 3.5% increase in 2017 over 2016. Purchase revenues grew on the back of benefits drawn from the flourishing residential real estate market.

Per Mortgage Bankers Association’s report, purchase originations increased 5.5% in 2017 while refinance originations declined 39.9%. This is attributed to a 1.4% improvement in direct premiums and escrow fees from domestic residential purchase transactions in the year.

First American Financial pursues strategic acquisitions, which in turn strengthen its core business as well as expand its valuation and data businesses. Last year, the company closed buyouts worth $91.1 million, which will likely consolidate its core title and settlement businesses. In February 2018, the company purchased Bank of America’s lien release business to enhance its post-closing and document-management capabilities.

The company has been effectively deploying capital and even hiked dividend by 11.8% last year.

Gauging the housing market’s favorable trends, the company expects continued growth in purchase business. Management also anticipates a strong commercial business owing to solid market fundamentals.

Lower tax rate due to the overhaul in tax policy, which slashed the tax rate to 21% from 35%, might lend an additional boost to the bottom line.

Other Noteworthy Factors

First American Financial carries a Zacks Rank #2 (Buy). With optimism surrounding the stock’s healthy performance, the Zacks Consensus Estimate for 2018 and 2019 has been revised about 18% and 16% upward, respectively, in the last 60 days.

The consensus mark for earnings and revenues translates to a year-over-year improvement for both 2018 and 2019. The expected long-term earnings growth is 13%, higher than the industry average of 10.7%

The stock carries a VGM Score of B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of all three factors. In fact both Value Scoreand Growth Score of B make the stock an attractive pick for investors. Backtested results have shown that stocks with a favorable Style Score of A or B coupled with a bullish Zacks Rank #1 (Strong Buy) and 2 are best lucrative options on offer.

Other Stocks to Consider

Investors interested in property and casualty industry can also check out CNA Financial Corporation (CNA - Free Report) , Everest Re Group, Ltd. and Heritage Insurance Holdings, Inc. (HRTG - Free Report) , each sporting a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

CNA Financial provides commercial property and casualty insurance products primarily in the United States. It came up with an average four-quarter beat of 46.88%.

Everest Re provides reinsurance and insurance products. It pulled off an average four-quarter positive earnings surprise of 10.86%.

Heritage Insurance provides personal and commercial residential insurance products. It delivered an average four-quarter beat of 14.66%.

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