| First
American (FAF) Still Looks Like a Bargain |
Published: January 19, 2006
Shares of First American
Financial (FAF) have now gained more than +70% since I recommended
the stock to my Market
Advisor premium newsletter subscribers just a year-and-a-half
ago. But with a likely slowdown looming for the mortgage market, company
earnings are expected to decline this year, leading some investors to
wonder whether they should take profits on the stock. I'd
suggest holding on.
First American operates in one
of the best markets in the country -- the title insurance business.
Here's a quick look at some of the reasons why I believe investors
should continue to hold shares of FAF for the long haul:
-- Barriers to entry are high
in the title insurance market, which is marked by just five main
national competitors.
-- FAF's enormous databases of real estate information would be
prohibitively costly for a new competitor to duplicate.
-- Price competition is almost nonexistent, as title insurance rates are
primarily set by state regulators.
-- With projected earnings of over $4.00 per share this year, FAF trades
at just 10X earnings. That's quite cheap for an industry leader in such
a secure market.
-- FAF boasts a nearly 30% market share (and growing) in the lucrative
title insurance business.
-- The firm's profit margins should continue to expand as FAF employs
new technology and lowers its costs.
-- The firm's return on equity is solid, approaching 17% over the course
of the last year.
-- FAF is a cash-generating machine. In the past year the firm has
brought in over $900 million in operating cash flow -- a tremendous sum
for a company with an enterprise value of just $3.6 billion.
While I don't expect the stock
to post sensational gains yet again in 2006, for all of the reasons
outlined above, this is a great business to be in and I think FAF will
continue to steadily outperform the market going forward. As such, I
plan to hold the stock in my model portfolios for the long haul.
Good investing!
-- Paul Tracy
Editor
StreetAuthority
Market Advisor
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Paul Tracy
founded StreetAuthority and became Editor in Chief in 2001. Prior to
that he spent several years as Managing Editor at a multi-million dollar
financial publishing firm with over 150,000 subscribers. In addition to
his role as managing editor and lead financial writer, he was also
responsible for equity research and managing a team of seasoned
professional financial writers, researchers and market commentators.
Paul's previous experience
includes a position at Robert W. Baird & Co.'s full-service
brokerage operations as well as economic research work on a Money and
Banking project funded by the National Bureau of Economic Research. He
has also spent time doing outside consulting and research for the
University of Virginia, has appeared as a guest expert on several
prominent financial radio shows, and has been a featured speaker at
various investment conferences across the U.S.
Paul graduated with a B.S.
in Finance and Management from the McIntire School of Commerce at the
University of Virginia.
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