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Here's Why First American (FAF) Stock is an Attractive Bet Now

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First American Financial Corporation (FAF - Free Report) has been in investors’ good books on the back of its mortgage origination activity and solid cash position.

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 16.8%. Its earnings per share have grown at a five-year (2015-2019) CAGR of 24%.

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 (Buy) offer the best opportunities in the value investing space.

Moreover, the company’s 13.1% return on equity (ROE) is better than the industry average of 5.6%, reflecting its efficiency in utilizing shareholders’ funds.

First American’s performance has been improving over the past several years, attributable to increased direct premiums and escrow fees, agent premiums, as well as net investment income. The Zacks Consensus Estimate for the company’s 2020 revenues is pegged at $6.76 billion, indicating an increase of 9% from the year-ago reported figure. Sale and refinancing of residential and commercial real estate, along with an increase in domestic title orders closed by its direct title operations are expected to drive revenues in the near term.

The company has been witnessing improvement in purchase revenues on the back of closed order growth and higher fee per file. Loan mortgage rates are driving substantial demand and price appreciation has been robust, given the limited inventory of houses for sale. This Zacks Rank #2 (Buy) title insurer’s pipeline appears strong, as purchase open orders were up 14% in the third quarter and rose in October as well.

The majority of First American’s businesses are dependent on the activities in real estate and mortgage markets, which are cyclical and seasonal. Increased mortgage financing availability has a positive effect on residential real estate activity, which typically increases the company’s revenues. Growth in real estate transactions and mortgage origination activity leads to higher demand for the company’s title information products, which in turn increases information and other revenues.

In order to enhance the mortgage market, First American has formed strategic relationships with LendingQB, Clarifire, Home Point Financial for seamless and easy accessibility to its loss mitigation products as well as services.

First American has raised its dividend at a seven-year (2014-2020) CAGR of 24.2%. The company’s current dividend yield of 3.6% is better than the industry average of 0.4%, which makes the stock an attractive pick for yield-seeking investors. Currently, it has $157.3 million remaining under the share repurchase authorization.

As of Sep 30, 2020, the company had $700 million available on the revolving credit facility, and cash and cash equivalents of $67.4 million. Its liquidity is sufficient to satisfy the anticipated cash requirements and obligations for at least the next 12 months. Also, total debt to capital of 17.6% compares favorably with the industry’s 20.6%.

First American’s times interest earned, a measure to identify the company ability to service debt, of 16.6 is good compared with the industry’s average of 12.5, implying that its earnings are sufficient to cover interest obligations.
Over the past 30 days, the company’s 2020 and 2021 earnings estimates have moved 19.5% and 10.3% north, respectively.

However, shares of First American have lost 16.3% year to date compared with the industry’s 3.8% decline. Nevertheless, strong fundamentals such as growing direct premiums, escrow fees and agent premiums, as well as effective capital deployment should help its shares bounce back.

Other Stocks to Consider

Investors interested in the property and casualty industry may also consider American Financial Group (AFG - Free Report) , Fidelity National Financial Inc. (FNF - Free Report) and Arch Capital Group (ACGL - Free Report) , each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

American Financial surpassed estimates in three of the last four quarters, with the average surprise being 5.85%.

Fidelity National Financial surpassed earnings estimate in each of the last four quarters, with the average being 30.48%.

Arch Capital surpassed estimates in three of the last four quarters, with the average surprise being 31.76%.

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