At Motley Fool Inside Value, we're running a contest called "A Stock I'd Love to Own" in celebration of our first anniversary. We're asking subscribers to describe their dream stocks in approximately 500 words. The subscriber who posts the best entry will receive a free year of Inside Value.
The purpose of this contest is to enhance our Watch List of superior companies. After all, the key to successful value investing is to constantly keep tabs on a "wish list" of great companies. That way, when the market temporarily sours -- as it's wont to do -- you're ready to pounce and snap up shares of your favorite stock at cut-rate prices. It's a strategy that requires a great deal of patience, but it can be immensely rewarding. Just ask master value investor Warren Buffett, who turned his taste for Cherry Coke and admiration for the Coca-Cola
Of course, by now you're probably wondering which stock I'd love to own....
A superior financial firm
First American is divided into two main divisions: financial services and information technology, although First American occasionally transfers portions of its portfolio to its 80%-owned subsidiary, First Advantage
The company continues to grow its business organically and through small acquisitions. The acquisitions spur greater growth by regularly adding valuable records to the database. The company has an exceptional record of wringing cost savings out of acquisitions by adding manual records to the database.
The information technology division is also built on databases and consists of four main segments: mortgage, property, credit, and screening information. The mortgage information segment provides real estate tax-monitoring services, flood-zone certification, and default management services in the handling of loss mitigation, foreclosures, and claims processing. First American is the dominant service provider in each of these service industries. It provides credit data to credit bureaus such as Experian and Equifax
In the U.S., title insurance is dominated by First American and Fidelity National
In addition to its domestic growth strategy, First American will continue to grow in Canada and the U.K., where it is already the leading title insurer. The use of title insurance has been slow to catch on outside the U.S., but there is a growing requirement by mortgage lenders for its use.
The biggest risk to First America is the volatility of the mortgage refinancing market which, when in full flood, adds significantly to the bottom line. Regular mortgage originations do not fluctuate to the same extent, and are generally projected to increase 8% to 10% nationally over the next several years. Any hint of a serious downturn in housing is likely to result in a drop in share price. This happened as recently as last year, when the shares dipped below $25. Since that time, the company has taken steps to reduce its reliance on cyclical revenues. Insurance regulators could bring pressure to bear on prices, as recently happened with refinance rates in some states.
The Foolish bottom line
First American's underlying non-cyclical businesses are on a nice growth trajectory. I view the cyclical revenues, particularly those from refinancings, as an irregular bonus that improves the company's ability to buy back shares and self-finance its growth. The company sports a P/E of around 11, a price-to-book ratio of around 1.5, and has a net cash position of $700 million. Better still, the company's enterprise value-to-free cash flow is below 8.
This is definitely a stock I'd like to own -- but wait a minute! I already own it courtesy of my wife, who bought a few shares when the price dipped last March. I highly recommend that you put this one on your watch list so you'll be ready for the next dip, if it should happen.
More importantly, if you'd like to enter our contest or see which stocks the Fool's other value mavens would love to own, take a no-obligation, 30-day free trial to Inside Value. (Full contest rules are available by clicking here.) You'll have access to all of my previous picks, and if you win the contest, you will receive a free one-year subscription to the service. Runners-up will receive free six- and three-month subscriptions. Click here to learn more.
Philip Durell is lead analyst of Motley Fool Inside Value . He owns shares of First American. First American and Coca-Cola are Inside Value recommendations.