Title insurance isn’t exactly the sexiest area of the U.S. economy. In fact, if you haven’t owned a home, you may not even know what it is. First American Financial (FAF) sure does. It’s the second-largest title insurance company in the country after Fidelity National Financial (FNF).
Title insurance protects an owner or lender against loss in the case of a property ownership dispute. It’s used most frequently for mortgages and is required by a large number of lenders. If you are a homeowner, you generally pay for the title insurance, even though it is generally held by the lender.
With the housing market in the dumps, now may seem like the worst time to buy a title insurance company. But the real estate market will come back, and either of these may be a stock well worth owning for the long term.
Title insurers see a piece of any real estate transaction, sale or refinancing. So any real estate activity boosts their profits. Title insurance companies are generally able to increase their profit margins after real estate downturns, according to a Morningstar analysis.
You might want to consider First American over Fidelity National, as First American focuses more on organic growth, while Fidelity National focuses more on acquisitions to build its business.
In addition, First American has a lower price-to-earnings ratio (based on trailing 12-month earnings) of 12.8, compared to Fidelity National’s 14.2.
By the numbers
First American’s revenue is on the upswing, rising 2.6 percent to $931.7 million in the first quarter from $908.4 million a year earlier.
The company suffered a net loss of $15.3 million in the latest quarter, reversing last year’s $13.8 million gain. But that stemmed largely from a guaranteed valuation product First American sells in Canada.
"We are cancelling the product in its current form and are looking to reinsure a modified version,” First American CEO Dennis Gilmore said in a statement. “If we cannot reinsure all or most of the risk, we will terminate the product.”
The Thompson/First Call mean recommendation of analysts rating First American stock is hold.
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