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Here's Why Hold is an Apt Strategy for First American (FAF)

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First American Financial Corporation (FAF - Free Report) is poised to grow on the strength of its solid commercial business, expanding valuation and data businesses and effective capital deployment. The company has a decent track record of delivering earnings surprise in three of the last four quarters, with the average beat being 16.83%.

The stock has seen its estimates for 2021 move up 0.6% in the past 30 days, reflecting investor optimism. The company’s trailing 12-month return on equity (ROE) of 13.1% betters the industry average of 5.6%. The company aims to generate 12-14% ROE over the long term.

First American remains well poised to capitalize on the increased demand among millennials for first-time home purchases. This Zacks Rank #3 (Hold) title insurer’s purchase and refinance businesses have been benefiting from robust order trends and consistent cost-control efforts. After witnessing a slowdown owing to the COVID-19-induced market volatility, the commercial market has stated to grow. Low mortgage rates and strong demand for housing are expected to drive refinance and purchase activity. Its earnings per share have witnessed five-year (2015-2019) CAGR of 24%.

The company has been generating improving revenues over the years on the back of growing direct premiums and escrow fees, agent premiums and net investment income.  Sale and refinancing of residential and commercial real estate, along with an increase in domestic title orders closed by its direct title operations should help it retain the momentum.

Though expenses have been increasing over the years, the magnitude of revenue increase has been driving margin expansion.

Strategic initiatives to strengthen its product offerings and intensifying focus on its core business while planning to divest its property and casualty insurance business, which is not performing as per expectation, should bode well.

With respect to enhancing shareholder value, First American has raised its dividend at a five-year (2014-2020) CAGR of 12.2%. The company’s 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. Also, the payout ratio of 33.3 compares favorably with the industry average of 13.7. These make the stock an attractive pick for yield-seeking investors.

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

Shares of First American have gained 9.6% in the past six months compared with the industry’s 20.8% increase.

Stocks to Consider

Some better-ranked companies from the same space are Fidelity National Financial (FNF - Free Report) , NMI Holdings (NMIH - Free Report) and The Allstate Corporation (ALL - Free Report) .  

Fidelity National delivered an earnings surprise of 18.40% in the last reported quarter. It sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank.

NMI Holdings delivered an earnings surprise of 27.03% in the last reported quarter. It carries Zacks Rank #2 (Buy).

Allstate delivered an earnings surprise of 66.10% in the last reported quarter. It carries Zacks Rank #2

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