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First American Financial Keeps Riding the Housing Wave

By Dan Caplinger – Oct 24, 2016 at 8:57AM

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The title company continued to see stronger activity levels, so why weren't shareholders happy?

The rebound in the housing market has given Americans a second chance after the financial crisis, and title insurance company First American Financial (FAF 1.83%) has made the most of its new opportunity to bounce back from the housing bust.

With exposure to both the residential and commercial real estate markets, First American Financial has made great strides both in its financials and its stock price, and coming into Thursday's third-quarter financial report, investors expected the title insurer to keep performing strongly. The company didn't disappoint with its numbers, even though shareholders didn't celebrate the news with added stock-price gains.

Let's look more closely at how First American Financial did and what could lie ahead for the title insurer.

Image source: First American Financial.

First American sees sales, profits rise

First American Financial's third-quarter results looked upbeat compared to what most investors were expecting to see. Revenue growth accelerated to 9%, producing sales of $1.51 billion and topping the consensus forecast by more than $60 million. Similarly, net income soared by more than 40% to $107.3 million, and that produced earnings of $0.96 per share, which was $0.06 higher than what most of those following the stock were looking for.

Looking more closely at First American's financials, the company continued to show reasonably good results from both of its major segments. The key title insurance and services division saw sales grow 8%, but a rise in operating margin of nearly 3 percentage points sent pre-tax income up by close to two-fifths. The number of direct open orders soared by more than 54,000 to 364,900, and direct closed orders showed similar percentage gains in climbing to 268,400. The commercial subsegment of the title unit was weaker than the residential side, with revenue, order activity, and average revenue per order all falling from year-ago levels. Meanwhile, the information and other revenue subsegment posted a 9% rise in sales, due in part to recent acquisitions but also supported by higher demand for title plant and information products.

First American's special insurance segment had reasonably solid performance. Revenue climbed about 8%, and that led to a small gain in pre-tax income. However, at just $1.8 million, the unit makes only a tiny contribution to the company's overall results. Meanwhile, investment income was up 14% to $29 million, with higher interest income coming from a larger portfolio, and net realized investment gains also helped First American's results.

CEO Dennis Gilmore cited First American's efforts to streamline its internal operations as much as possible. "The results were driven by our continued focus on operating efficiency," Gilmore said, "combined with a strong refinance market."

What's ahead for First American Financial?

Yet First American is also turning to the mergers and acquisitions arena in order to seek smarter growth. The company completed two acquisitions, and one of them, RedVision, will help boost First American's ability to provide title services and data to its customers. The other purchase, TD Service Financial, will complement First American's current mortgage solutions division to broaden its ability to offer services after housing-related transactions close.

Of course, the big question that First American will have to face in the long run is what will happen to interest rates. The Federal Reserve has been slower in boosting short-term rates than most investors had expected, and that has also had the result of keeping the longer-term rates on which most mortgages are based low as well. Nevertheless, most now expect the Fed finally to start accelerate its rate moves higher, and the impact on mortgage activity could be less than ideal.

First American Financial shareholders seemed to want even more than what the company delivered, and so they sent the stock down almost 2% during the trading day following the announcement. Fundamentally, though, real estate is continuing to support First American, and as long as central bankers don't hurt the housing market, First American's prospects still look encouraging.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends First American Financial. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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