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First American Financial: A Strong Buy

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Rising earnings estimates on the back of strong second quarter results – including a 47.7% earnings surprise – helped First American Financial Corporation (FAF - Free Report) achieve a Zacks #1 Rank (Strong Buy) on September 12. Moreover, this provider of title insurance and settlement services has delivered positive earnings surprises in three of the last four quarters with an average beat of 38.9%.   

With a solid year-to-date return of 58.3% and a history of beating quarterly earnings estimates, this stock offers an attractive investment opportunity.

The Rank Driver

Better-than-expected second quarter earnings, revenue growth, as well as cost-efficient and scalable operations leading to improving operating margins – are the primary rank drivers for this stock.

First American Financial reported its second quarter results on July 26 with earnings per share of 68 cents. Excluding the impact of net realized investment gains worth 3 cents per share, earnings came in at 65 cents, topping the Zacks Consensus Estimate of 44 cents by 47.7% and year-ago adjusted earnings of 32 cents by 103.1%.

Robust results for the quarter were primarily aided by higher revenue and improving margins. Title Insurance and Services segment pretax margin of 11.7% in the second quarter was the highest since 2005.

Total revenues were $1.1 billion, up 18% from the year-ago quarter and included an escalation of 18% in revenues in the Title Insurance and Services segment. Direct premiums and escrow fees increased 27% year over year while Agent premiums advanced 15% in the reported quarter. Moreover, Commercial division revenues surged 16% from the year-ago quarter.

Sturdy refinancing activity primarily drove a 36% year-over-year increase in title open orders. With robust results in the first half of the year and a solid pipeline, the company remains optimistic and expects to achieve its target of 8%–10% title margin for the full year 2012.

Personnel costs of $299.3 million were up 11% year over year, largely driven by increased incentive-based compensation stemming from improved revenues and profitability. This was partly mitigated by lower severance expense associated with the cost reduction initiatives. Other operating expenses advanced 4% from the year-ago quarter to $189.8 million, mainly due to higher production-related expenses.   

Earnings Estimate Revisions

The Zacks Consensus Estimate for 2012 increased 33.8% to $1.90 per share from $1.42 over the last 60 days. The current estimate implies a year-over-year growth of 50.4%.

For 2013, the Zacks Consensus Estimate went north by 9.1% to $1.44 per share over the same time frame.


First American Financial currently trades at a forward P/E of 10.7x, a 7.0% discount to the peer group average of 11.5x. Also, on a price-to-book basis, the shares are trading at 1.00x, a 5.3% premium to the peer group average of 0.95x. Given the company's strong fundamentals, the premium valuation is justified.

First American Financial has a trailing 12-month ROE of 9.3% compared with the peer group average of 8.8%.

About the Company

Based in Santa Ana, California, First American Financial Corporation, through its subsidiaries, offers financial services in the U.S. and internationally. It provides title insurance and settlement services to the real estate and mortgage industries.

Moreover, it offers valuation products and services as well as property and casualty insurance among others. These are offered through its agents as well as partners in all 50 states and internationally. The company has a market capitalization of roughly $2.1 billion.

Other Zacks #1 Rank financial sector stocks include First M&F Corporation and Acacia Research Corporation (ACTG - Free Report) .

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