*All data are as of the close of Friday, December 26, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
There are only 9 publicly traded companies in the Surety & Title Insurance industry, 3 of which trade on the OTC with little or no financial data, and one not having "any significant operations". Of the remaining five which are viable investment choices, only one has beaten the broader market S&P since the economic recovery began nearly 6 years ago. Yet even its earnings over the foreseeable future look grim, as does the growth of the entire industry. The only surety here seems to be in the industry's name.
Just what is the Surety & Title Insurance industry all about? In the simplest of definitions:
"Surety and Title Insurance companies engage in underwriting insurance policies to protect owners' and lenders' interest in real property against loss and liability caused by title defects and related matters. These companies also provide bond guarantees to ensure that contractual obligations are carried out."
We get a little more clarity by looking at each of the top three companies' activities:
• Fidelity National Financial, Inc. (NYSE: FNF), headquartered in Jacksonville, Florida, provides title insurance, technology, and transaction services to the real estate and mortgage industries, offering title insurance, escrow, and other title related services, including collection and trust activities, trustee's sales guarantees, recordings and reconveyances, and home warranty insurance. The company also offers technology, and data and analytics services for mortgage lenders and other lending institutions, customized outsourced business process and information solutions, including origination services and property appraisals for the origination market and for assets in default, as well as appraisal management services and default services to national lenders, loan servicers, and other real estate professionals. The company is also involved in the design, manufacture, re-manufacture, marketing, and distribution of aftermarket and original equipment components for automobiles, light trucks, heavy-duty trucks, and other vehicles. Further, the company owns and operates restaurants comprising of O'Charley's, Ninety Nine Restaurants, Max & Erma's, Village Inn, and Bakers Square, as well as Stoney River Legendary Steaks.
• Assured Guaranty Ltd. (NYSE: AGO), headquartered in Hamilton, Bermuda, provides credit protection products to public finance, infrastructure, and structured finance markets, offering insurance that protect holders of debt instruments and other monetary obligations from defaults, as well as insurance on securities, including bonds issued by the United States, state or municipal governments, on notes issued to finance international infrastructure projects, on asset-backed securities issued by special purpose entities, as well as on general obligation, tax-backed, municipal utility, transportation, healthcare, higher education, housing revenue, infrastructure, investor-owned utility, and other public finance bonds. The company also insures and reinsures finance obligations, including pooled corporate obligations, residential mortgage-backed securities, financial products, consumer receivables securities, commercial mortgage-backed securities, commercial receivables securities, insurance securitization securities, and other structured finance securities.
• OneBeacon Insurance Group, Ltd. (NYSE: OB), headquartered in Hamilton, Bermuda, provides specialty property and casualty insurance encompassing professional liability, employment practices liability, management liability, tuition reimbursement insurance, excess property solutions, various multi-line package insurance solutions, environmental risk solutions, commercial bonds, and multi-peril crop and crop-hail insurance. It also offers ocean marine insurance involving commercial hull and marine liabilities, ocean and air cargo coverage, yachts, ship builders, ocean energy operations, installation floaters, fine arts, motor truck cargo, transportation, property, general liability, business auto, commercial umbrella, workers compensation, technology errors or omissions, data privacy, communications liability, in addition to coverage for accidental death and dismemberment, occupational accident, sports accident, non-truckers liability, vehicle physical damage, and other accidents. The company also provides insurance coverage for the entertainment, sports, and leisure industries.
While all three companies are engaged in very similar types of activities (with the exception of Fidelity's involvement in restaurants and vehicle equipment manufacturing), not all have been performing similarly as investments. In fact, the three lay at opposite ends of the spectrum, as graphed below.
Since the economic recovery began in early 2009, where the broader market S&P 500 index [black] has gained 209% and the SPDR Financial Sector ETF (NYSE: XLF) [blue] has gained 299%, only Assured [purple] has beaten both benchmarks with a rise of 800%, while its two competitors, Fidelity [beige] and OneBeacon [orange], have floundered below both benchmarks considerably, with gains of 145% and 75%, respectively.
On an annualized basis, where the S&P has averaged 36.35% and the XLF has averaged 52.00%, Assured has averaged 139.13%, Fidelity has averaged 25.22%, and OneBeacon has averaged 13.04% per year.
Looking at future earnings growth, the Surety & Title Insurance industry as a whole is expected to grossly under-grow the broader market's average earnings as tabled below, where green indicates outperformance, while yellow denotes underperformance.
Over the next two quarters, the industry is seen shrinking its earnings nearly 100% over the prior year's corresponding quarter.
Though the industry returns to growth in 2015, its earnings still fall well short of the broader market's average growth, before finally reaching a slight underperformance over the next five years.
Zooming in a little closer, things don't look too much better for the three largest companies in the industry near term, as tabled below.
Assured, for one, is expected to shrink its earnings clear through 2015, with only slight growth over the next five years. Meanwhile, OneBeacon is expected to swing from underperformance near term to outperformance in 2015, before slipping back into a slight underperformance over the longer term.
Fidelity, however, promises attractive growth rates after a sluggish current quarter, beating the S&P's average growth at some 1.80 times next quarter, and 3.09 times in 2015, before settling to a more sustainable 1.53 times annually over the next five years.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, Fidelity delivered the greatest revenue growth year-over-year, while Assured delivered the least, even shrinkage along with OneBeacon.
Since OneBeacon's trailing earnings growth is not available, the metric does not factor into the comparison. Though it is worth noting that Fidelity's earnings beat Assured's, which shrank.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, Assured operated with the widest profit and operating margins, while Fidelity contended with the narrowest.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, Assured's management team delivered the greatest returns on assets and equity, while OneBeacon's and Fidelity's teams split the least returns between them.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies compared here, Assured provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while Fidelity's DEPS over current stock price is lowest.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, Assured's stock is cheapest relative to forward earnings and company book value, while Fidelity's stock is cheapest relative to 5-year PEG. At the overpriced end of the scale, Fidelity and Assured reciprocated their stocks' preceding rankings.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, Assured offers the highest percentage of earnings over current stock price for all time periods, while Fidelity offers the lowest percentages in all periods.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, OneBeacon offers the greatest growth in the current quarter and in 2015, where Fidelity offers it next quarter and over the next five years. At the low end of the spectrum, OneBeacon offers the slowest growth prospects next quarter (even shrinkage), where Assured offers it in the current quarter, in 2015, and beyond (even shrinkage near term).
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe Assured's stock offers the greatest upside potential and least downside risk, while OneBeacon's stock offers the least upside and Fidelity's offers the greatest downside.
It must be noted, however, that Assured's stock is already trading below its low target. While this may mean increased potential for a sharp move upward, it may warrant a reassessment of future expectations.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Assured is best recommended with 2 strong buys and 4 buys representing a combined 100% of its 6 analysts, followed by Fidelity with 3 strong buy and 4 buy ratings representing 77.78% of its 9 analysts, and lastly by OneBeacon with 0 strong buy and 0 buy recommendations representing 0% of its 3 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below, you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Assured by an assured victory, outperforming in 17 metrics and underperforming in 8 for a net score of +9, followed far behind by OneBeacon as number two, outperforming in 6 metrics and underperforming in 7 for a net score of -1, with Fidelity lacking financial fidelity in third place, outperforming in 6 metrics and underperforming in 13 for a net score of -7.
Where the Surety & Title Insurance industry is expected to underperform the S&P broader market substantially this and next quarters, meaningfully in 2015, and negligibly beyond, the largest three companies in the space are seen split performing dramatically in earnings growth, with Fidelity leading most of the way, Assured trailing most of the way, and OneBeacon weaving in and out of them.
Yet after taking all company fundamentals into account, Assured Guaranty Ltd. ensures the soundest financials, given its lowest stock price to forward earnings and company book, widest profit and operating margins, greatest returns on assets and equity, highest diluted earnings over current stock price, highest future earnings over current stock price in all periods, best price targets, and most strong buy and buy analyst recommendations - winning the Surety & Title Insurance industry competition most assuredly.