First American Beats Estimates - Its Former Weakness Seems Silly

I obviously did an incredibly poor job of checking to see who was reporting today; First American (FAF) (title insurance), another decent-sized holding, reported this morning and put in a great number. Unfortunately this name has been so tied into mortgage rates (I think incorrectly), but you can't argue with the market. It's such a quiet stock I missed the breakout the past few days as well... hmm. Need to clone myself, right quick - not enough hours in the day.


Looks like they beat estimates by 16 cents, which makes the weakness of the stock every time it was hammered when mortgage rates jumped all the more silly. Remember the thesis behind the title insurers is homes exchange hands - 30 year rates don't need to be at 5.2% for that to happen. Each foreclosure handed off to a vulture is a new title exchange... but again, see paragraph one: the market can't be argued with.

In full disclosure, while stock after stock we own has been dancing to the heavens - at this point with almost every stock in the universe going up as HAL9000 does his thing, I cannot tell anymore which stocks are going up on merit and which are going up on actual solid business metrics. Our companies seem to be doing well on the business side, but countless companies which are not doing well but "beating expectations" are also surging. Therefore, there appears little value to these things we call fundamentals, but I'll still type about them for entertainment purposes.

Via Reuters

• Net income attributable to shareholders of the Santa Ana, California-based company rose to $70.3 million, or 75 cents per share, from $19.6 million, or 21 cents, a year earlier. Excluding investment losses, profit was 89 cents per share, the company said. Revenue fell 9 percent to $1.54 billion, while expenses fell 15 percent.
• Analysts on average had expected a profit of 73 cents per share on revenue of $1.57 billion, according to Reuters Estimates.

Again I just continue to shake my head that companies can "exclude" things like investment loss and analysts say it doesn't count. Management option shares grants don't count, investment losses don't count, headcount reductions don't count. It's a pet peeve of mine, but seriously U.S. companies are far more expensive when you look at what the cost of business truly is. This is why when I hear the market is valued at XX Price to Earnings, I just roll my eyes. Thankfully we all live in a parallel universe where "1x costs" (many of which happen quarter after quarter - i.e. management bonuses) are not a true cost. Don't we all wish we could exclude our investment losses from reality? Well if you do, go run a public firm.

Anyhow....

• Revenue from title insurance and related services dropped 16 percent to $935.3 million as the average fee per order fell, though the number of title orders closed grew by 9 percent.
• Title insurance guarantees that property owners have title to property and can legally transfer that title. Many lenders require that buyers have the insurance before extending loans.

The company has a few divisions other than title insurance - they seem do be doing ok as well, but not the focus of the investment here. Full

report here

• The company's direct operations closed 438,100 title orders for the second quarter of 2009, an increase of 9 percent, when compared with 401,200 title orders closed in the second quarter of 2008. Average revenue per direct title order was $1,302, an 18 percent decline relative to the second quarter of 2008.

Disclosure: Long First American in fund; no personal position

Comments

[Roger Knights]

"there appears little value to these things we call fundamentals, but I'll still type about them for entertainment purposes."

Please continue, it's very entertaining.

2009 Jul 30 07:53 PM

[John Galt]

Trader Mark-

You see as well as I see that our government is doing everything to "keep people in their homes". Even if they turn from "owners" into renters.

I guess your thesis on the title insurers is that higher housing turnover = more demand for title insurers. Right?

Do you believe this demand will be from subprime/foreclosure properties changing hands to more financially sound buyers?

2009 Jul 31 08:41 AM

[TraderMark]

I bought this one (and FNF) quite a while ago - I think mid winter.
The thesis was the housing market would turn from dead to a rash of turnover in the low end, especially among foreclosures.

When mortgage rates jumped to over 5.5% these stocks were bombed. Which I thought silly since 5.5% used to be considered a dream rate. But i suppose relative to 4.8% not as much.

Market makes little sense in shorter time frames as the quant computers surely are programmed to "interest rates up = title insurance stocks short"


On Jul 31 08:41 AM John Galt wrote:

> Trader Mark-
>
> You see as well as I see that our government is doing everything
> to "keep people in their homes". Even if they turn from "owners"
> into renters.
>
> I guess your thesis on the title insurers is that higher housing
> turnover = more demand for title insurers. Right?
>
> Do you believe this demand will be from subprime/foreclosure properties
> changing hands to more financially sound buyers?

2009 Jul 31 12:36 PM