A month has gone by since the last earnings report for First American Financial (
FAF Quick Quote FAF - Free Report) . Shares have added about 8.4% 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 drivers.
First American Financial Q3 Earnings Miss, Revenues Top
First American Financial reported third-quarter 2020 operating income per share of $1.31, which missed the Zacks Consensus Estimate by about 3%. The bottom line declined 20.1% year over year. The purchase and refinance businesses continued to perform well, benefiting from strong order trends and continued focus on cost efficiency. However, expenses increased.
Behind the Headlines
Operating revenues of $1.9 billion increased 15% year over year on the back of higher agent premiums, direct premiums and escrow fees and information and other revenues. Moreover, the top line beat the Zacks Consensus Estimate by 13.2%. Net investment income however decreased 31.5% to $52.5 million.
Total expense of $1.7 billion increased 17.1% year over year due to higher personnel costs, premiums retained by agents, provision for policy losses and other claims, depreciation and amortization, interest, and other operating expenses.
Segment Results Title Insurance and Services: Total revenues increased 15% over year to $1.8 billion. The upside was driven by improved direct premium and escrow fees; increased agent premiums as well as higher information and other revenues, which can be primarily attributed to the recent acquisition of Docutech and growth in mortgage originations that led to higher demand for the company’s title information products. However, pretax margin expanded 250 basis points (bps) year over year to 19%.
Title open orders increased 29.4% to 410,600 while Title closed orders increased 30% year over year to 291,500, driven by an 85% increase in refinance orders. Average revenue per order decreased 13%, driven by the shift to refinance transactions. Average revenue per direct title order declined to $2,193, primarily attributable to shift in the mix of direct title orders to lower premium refinance transactions. Average revenue per order for purchase transactions increased 8% while average revenue per order for commercial transactions decreased 17%.
Specialty Insurance: Total revenues increased 6% year over year to $136.3 million, driven by higher direct premiums and escrow fees. However, pretax margin was (52.9%) against 8.5% in the year-ago quarter.
The company initiated a process to divest the property and casualty business. While this business has performed well over the years, the title insurer has decided to focus on its core business and redeploy capital to areas with higher expected returns. A pretax impairment of assets held for sale of $73.3 million or 49 cents per share was recorded related to the property and casualty business.
First American exited the quarter with cash and cash equivalents of $1.5 billion, up 1.8% from 2019 end. Notes and contracts payable were $1 billion, up 38.9% from 2019 end. Stockholders’ equity was $4.7 billion, up 6.9% from 2019 end. Cash flow from operations was $313.3 million, up 0.8% year over year.
Given low mortgage rates and robust demand for housing, the company expects refinance and purchase activity to remain at elevated levels for the remainder of the year.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 29.41% due to these changes.
Currently, First American Financial has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise First American Financial has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.