KBW's Bose George upgrades title insurers Fidelity National Financial (FNF +3.5%) and First American Financial (FAF +2.6%) to Buy, telling clients his team is changing its valuation approach for a greater focus on longer-term earnings.
The sector (FNF and FAF control about 2/3 of U.S. title insurance volume) has underperformed this year on concern about slowing refinance volume, but George expects the market to look past the valley and see strong earnings growth in 2015 and beyond as the home purchase market continues its recovery.
He notes MBA mortgage data - slowing big-time of late - understates purchase activity as it does not track cash sales which happen to a fast-growing segment of total activity.
The price target for FNF is hiked to $31 from $27, in part as George boosts his 2014 EPS estimate to $1.85 from $1.66 thanks to the acquisition of Lender Processing Services (LPS) - expected to close in Q4.
FAF's price target is unchanged at $28.