On Monday, Fidelity National (NYSE:FNF), the largest title insurer in the U.S., reported second-quarter earnings ahead of analyst projections. The stock rose strongly as a result, and now trades above book value per share. The share price is also bumping up against its highs over the past year, both of which suggest it is no longer the bargain it was earlier in the year.
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Second Quarter Recap
Total revenue fell 12% to $1.3 billion, and consisted of a 6.2% fall in title premium revenue, which accounted for 63.6% of the total top line. Escrow and title-related fees brought in another 25.2% of revenue, as revenues in this segment fell a modest 0.7%. The remainder of revenue consisted of specialty insurance and investment income, both of which grew modestly to account for 11% of revenue. The biggest decline was a dramatic drop in realized gains to $1.9 million from $124.2 million in last year's second quarter. This was due primarily to the sales of a claims management business.
Management was able to lower total expenses by 5.3% to $1.2 billion, but reported operating income was cut nearly in half due to last year's realized gain, or down 48.4% to $110 million. Lower taxes and income from equity investments helped temper the net income decline to 42.7%, as earnings fell to $80 million. This worked out to earnings per diluted share of 36 cents, which came in ahead of analyst projections and was 5.9% ahead of last year's 34 cents when backing out the claims management sale.
Analysts currently project a full year sales decline of more than 11% for total sales of just over $5 billion. The consensus profit estimate currently stands at $1.15 per share, or year-over-year decline of almost 30% on a reported basis.
The Bottom Line
Despite the uneven reported trends from Fidelity National, management was happy to report an "impressive" 11.7% pretax margin in its title business and strong business trends from commercial clients. Book value also ended up slightly, rising 2.7% to $15.80 per share.
As the largest title insurance provider in the U.S., ahead of rivals including First American Financial Corporation (NYSE:FAF) and Stewart Information Services Corp. (NYSE:STC), Fidelity National has the most potential upside in a sustained recovery in the housing market. House refinancing activity accounted for more than half of order volumes during the quarter, and combined with strong commercial activity, is driving the business right now.
At some point, house sales and new residential activity from the likes of Toll Brothers (NYSE:TOL) and PulteGroup (NYSE:PHM) will return to more historic levels and also drive growth at Fidelity National. At a forward P/E of nearly 14 and stock price that trades at 106% of book value, the stock is now starting to discount a recovery that has yet to happen. (For additional reading, see Book Value: How Reliable Is It For Investors?)
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