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Here's Why First American Financial Stock is an Attractive Bet

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First American Financial Corporation (FAF - Free Report) is well-placed to gain from high premiums and buyouts, which, in turn, is boosting its top-line growth.

This property & casualty (P&C) insurer has an impressive surprise history. It surpassed earnings estimates in each of the trailing four quarters, the average beat being 17.7%. The Zacks Consensus Estimate for current-year earnings has been revised 3.3% upward over the past 30 days.

Shares of this Zacks Rank #1 (Strong Buy) company have lost 22.5% in a year compared with its industry’s decline of 12.6%. Keeping in mind the company’s strong fundamentals, the decline in price performance can be looked upon as a great opportunity for the investors, who are willing to buy the stock.

Solid Fundamentals Driving First American Financial

The company has been riding on improved direct premiums and escrow fees as well as agent premiums, which has resulted in top-line growth as well. While agent premiums inched up 3.9% year over year in 2019, direct premiums and escrow fees improved nearly 6% year over year. As a result, revenues registered a rise of nearly 8% in 2019. Strong revenues have contributed to the company’s margin expansion as well.

Moreover, First American Financial seems to be in a bid to pursue buyouts, which is likely to enhance its existing capabilities as well as strengthen its data and valuation business. The company completed two notable buyouts in 2020.

In March, it acquired software solutions provider, Docutech, which, in turn, is likely to boost the home-buying experience for consumers and enhance the digital transformation of the real estate settlement process. The buyout of Title Security Agency in January is expected to benefit the company’s top-line growth as well by providing exposure to title and escrow services for residential and commercial transactions in Arizona.

Furthermore, First American Financial flaunts a robust capital position, riding on a solid balance sheet. The company believes in returning value to shareholders in the form of dividend payments, which has witnessed a CAGR of 28.5% over the past five years (2014-2019). Its dividend yield of 4.2% is higher than the industry’s average of 0.5%.

Notably, First American Financial’s trailing 12-month return on equity (ROE) of 15.7% compares favorably with 6.4% for the industry. This reflects the company’s growth prospects along with the efficient utilization of shareholders’ funds.

However, the current low interest rate environment in the United States is likely to keep investment yields under pressure and hence, weigh on its overall investment income. In 2019, the company’s net investment income improved nearly 37% year over year.

Despite the current dismal price performance, we believe that its strong fundamentals are likely to drive its shares going forward.

Other Stocks to Consider

Some other top-ranked stocks in the insurance space are American Equity Investment Life Holding Co. (AEL - Free Report) , Amerisafe, Inc. (AMSF - Free Report) and James River Group Holdings, Ltd. (JRVR - Free Report) , each sporting a Zacks Rank #1 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

American Equity Investment, Amerisafe and James River Group surpassed earnings estimates in each of the trailing four quarters by 53.4%, 50.1% and 12.4%, respectively.

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