Rising earnings estimates on the back of strong second quarter
results - including a 47.7% earnings surprise - helped
First American Financial Corporation
) 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
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
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
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
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
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