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First American Financial (FAF) Up 1.4% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for First American Financial (FAF - Free Report) . Shares have added about 1.4% 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 Q4 Earnings and Revenues Beat

First American Financial reported fourth-quarter 2020 operating income per share of $2.11, which beat the Zacks Consensus Estimate by 29.5%. Also, the bottom line improved 17.2% 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 witnessed an increase.

Behind the Headlines

Operating revenues of $2.2 billion increased 24.3% 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 14.2%.

Net investment income, however, decreased 18.1% to $64.5 million.

Total expense of $1.8 billion increased 22.8% 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 24.1% year over year to $1.9 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 remained flat year over year at 16.8%.

Title open orders increased 40.9% to 354,600 while Title closed orders jumped 31.6% to 295,100, driven by a 75% rise in refinance orders.

Average revenue per order decreased 6%, due to shift to refinance transactions.

Average revenue per direct title order declined to $2,457, primarily due to shift in the order mix from higher-premium commercial and purchase transactions to lower-premium residential refinance transactions.

Average revenue per order for purchase transactions increased 11% while average revenue per order for commercial transactions jumped 2%.

Specialty Insurance: Total revenues increased 6.8% year over year to $140.6 million, driven by higher direct premiums and escrow fees.

However, pretax margin was 19%, up 230 basis points year over year.

The company entered into book transfer agreements to facilitate exit from the property and casualty insurance business in January 2021. The transaction is expected to be completed by the third quarter of 2022.

Full-Year Highlights

Full-year 2020 adjusted income of $5.45 per share missed the Zacks Consensus Estimate of $5.62. The bottom line decreased 5.4% year over year.

Total revenues increased 14.3% from the year-ago quarter to $7.1 billion and beat the consensus estimate of $6.8 million.

Financial Update

First American exited the quarter with cash and cash equivalents of $1.3 billion, down 14.2% from 2019 end. Notes and contracts payable were $1 billion, up 38.8%.

Stockholders’ equity was $4.9 billion, up 11.1% from 2019 end.

Cash flow from operations was $1.1 billion, up 19% year over year.

Return on equity was 14.9%. Debt-to-capital ratio was 23.7.

Share Repurchase and Dividend Update

The company bought back shares worth $138.6 million. It also raised its dividend twice by 5% each in 2020 to an annual rate of $1.84 per share.  The board of directors approved a new $300 million share repurchase program.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 25.27% due to these changes.

VGM Scores

Currently, First American Financial has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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.


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