Yahoo Finance First American (FAF) Stock Gains 5.5% YTD: More Room to Run?
First American Financial Corporation FAF shares have gained 5.5% year to date compared with the 0.1% rise of the industry. The Finance sector has declined 1.6%, while the Zacks S&P 500 composite has risen 10.6%. With a market capitalization of $5.7 billion, the average volume of shares traded in the last three months was about 0.6 million.
Continued investment in strategic initiatives, an improving Home Warranty segment and rising investment income are driving the stock.
First American’s ROE for the trailing 12 months was 12.2%, better than the industry’s average of 6.9%. This reflects First American’s efficiency in utilizing shareholders’ funds.
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Favorable Factors
Let’s delve deeper to unearth the factors working in favor of this Zacks Rank #3 (Hold) stock.
The Zacks Consensus Estimate for 2024 earnings per share is pegged at $5.47, suggesting an increase of 25.4% on 13% higher revenues. FAF beat earnings estimates in three of the last four quarters, missing once, with an average of 6.2%.
On the operations front, reducing expenses are likely to boost FAF’s margins in the coming days. In the first quarter, expenses declined 27.1% to $1.3 billion. It expects further cost reduction as it is delivering well on its expense management efforts. This indicates that FAF’s cost-management program is flourishing, and profits are expected to rise in the future.
The company expects transaction activity to improve in the second half of 2023, fueling growth in Title Insurance and Services revenues for the year. First American’s Home Warranty segment reported an improvement in the top line, driven by information and other and net investment income.
The company also relies on inorganic growth initiatives to grow its business. Its acquisition of ServiceMac started to show results as it turned cash flow positive in the first quarter and experienced revenue growth of 62%. First American completed the assets acquisition of 1031 Solutions, LLC in February 2023. The buyout will enhance First American’s continuing efforts to aid customers with improved service in the Rocky Mountain region and surrounding markets.
The company reported a jump of 136% in net investment income for the first quarter. A high-interest rate environment should continue to be a tailwind for this metric.
The company’s sturdy capital position supports effective capital deployment. FAF has increased its dividend at an eight-year (2016-2023) CAGR of 9%. Its dividend yield is currently 3.8%, much higher than the industry’s average of 0.4%. The insurer also has $256 million under its share buyback authorization program.
Risks
Despite the upside potential, there are some factors that investors should keep an eye out for.
The company’s operating cash flow was negative $92.3 million in the first quarter, down significantly year over year. Declining top line and pre-tax margins are also worrisome. Nevertheless, we believe that a systematic and strategic plan of action will drive long-term growth.
Key Picks
Some better-ranked stocks from the Property and Casualty insurance space are RLI Corporation RLI, Kinsale Capital Group KNSL and AXIS Capital Holdings Limited AXS.
RLI delivered a four-quarter average earnings surprise of 43.5%. Year to date, the insurer has lost 3.9%.
The Zacks Consensus Estimate for RLI’s 2023 earnings indicates a year-over-year increase of 4.1%. It sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Kinsale delivered a four-quarter average earnings surprise of 14.8%. Year to date, the insurer has gained 17.4%.
The Zacks Consensus Estimate for KNSL’s 2023 and 2024 earnings indicates a year-over-year increase of 33% and 19.7%, respectively. It currently carries a Zacks Rank #2 (Buy).
AXIS Capital delivered a four-quarter average earnings surprise of 6.5%. Year to date, the insurer has lost 2.8%.
The Zacks Consensus Estimate for AXS’s 2023 and 2024 earnings indicates a year-over-year increase of 33.2% and 11.1%, respectively. It presently carries a Zacks Rank #2.
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RLI Corp. (RLI) : Free Stock Analysis Report
Axis Capital Holdings Limited (AXS) : Free Stock Analysis Report
First American Financial Corporation (FAF) : Free Stock Analysis Report
Kinsale Capital Group, Inc. (KNSL) : Free Stock Analysis Report
