By Matt Doiron
CEO and Chairman of the Board Aldo Zucaro purchased close to 35,000 shares of Old Republic International (ORI) between July 30th and August 1st. Combined, the purchases took place at an average price of $7.99, with some coming at as high a price as $8.17; this last figure was roughly where the shares had closed as of this writing. Zucaro had made a number of insider purchases last November, at prices as high as around $8.60 per share, and had also added 10,000 shares in May at an average price of $9.85. While these particular cases have not turned out well for him, on a statistical basis insider purchases tend to be a bullish sign. Given that another Board member, James Hellauer, made a small purchase of 3,000 shares in late July at an average price of $7.83 per share, we might say that there is a consensus among insiders that the stock is a buy at these prices, which tend to be an even stronger bullish sign. However, this level of insider consensus also existed in May when Zucaro and another insider had bought at around $9.85, so perhaps these insiders are overly optimistic about their company. Of course, the fact that Zucaro is buying more shares now than he did in May should indicate that he is more confident that Old Republic will outperform now than he was then.
Old Republic is an insurance underwriter which is divided into three segments: the General Insurance unit offers various insurance products such as auto, general liability, and workers' comp, the Mortgage Guaranty unit insures residential mortgage loans (this unit is in run-off), and the Title Insurance unit provides title insurance policies. It competes with companies such as First American Financial Corp (FAF) and The Travelers Companies Inc. (TRV). As might be expected from its business, the past several years have not been kind to Old Republic and the stock is down over 50% from five years ago; it has slumped over 10% this year. The company has missed earnings estimates by horrendous amounts the past four quarters, with an average estimated quarterly EPS of about 3 cents per share and actual quarterly EPS of negative 19 cents per share over that period. Stubborn sell-side analysts continue to project positive earnings, giving the stock an implied forward P/E of 12. For the second quarter of 2012 the company reported a 10% increase in revenue compared to the second quarter of 2011, and cut its net losses in half compared to that period. For the first half of the year, revenue was up 6% and losses were cut by a bit over 50%; revenue grew in both the general and title insurance divisions, though the general insurance business saw a decline in operating profit.
Old Republic has limited interest from hedge funds. Pennant Capital Management, managed by Alan Fournier, owned 5 million shares at the end of March and had barely changed the position in the last year (see other stock picks from Pennant Capital Management). Irving Kahn's Kahn Brothers was also an investor with 2.7 million shares of the company. Kahn has also largely held its position constant over the past several quarters.
First American Financial and Travelers have seen different fortunes than Old Republic. These two peers are up about 40% and 7% respectively so far in 2012, are profitable on a trailing basis with P/E multiples of 12 and 11, and pay dividend yields of 1.8% and 2.9%. In First American Financial's case, this is probably because that company focuses on title insurance, a segment within the industry which seems to be doing well at Old Republic as well. Businesses seem to be Travelers' largest customers, likely enabling them to avoid the mortgage-related losses Old Republic has suffered. Another peer is Fidelity National Financial Corp (FNF), which provides title insurance and mortgage services. Fidelity National pays a 3% dividend yield and is priced at nine times trailing earnings, beating estimates by over 20% in each of the first two quarters of 2012. The company does trade at the book value of its equity, similar to First American Financial and Travelers, with Old Republic's P/B multiple being 0.6. In that sense, Old Republic could be argued to be a better value. We understand the statistical properties of insider purchases and can understand why an investor would follow Old Republic's CEO's lead, but Fidelity National in particular seems to us to be a better buy and we don't have a good deal of confidence in this particular insider's history of purchases.