Fidelity National Financial (FNF) has seen its performance lag that of the broader market by a fairly wide margin on a year-to-date basis. Since the start of the year, FNF has returned a negative 27%, compared to the 4.4% return of the S&P 500, which currently sits just a hair below its all-time high. Evidently, FNF has been left behind by the market rally over the past four months, while an enormous transfer of wealth has flooded into the tech sector, which has been a net winner this year. In this article, I evaluate why I believe FNF’s underperformance is unwarranted, and what makes this an attractive long-term investment; so let’s get started.
A Look Into Fidelity National Financial
Fidelity National Financial is a leading provider of title insurance and transaction services to the real estate and mortgage industries. Its title insurance business is the largest in the United States, and operates under the names Fidelity National Title, Chicago Title, and as three other regional title insurance underwriting companies. As seen below, FNF has had a strong track record of steady revenue growth over the past decade, growing at an annual CAGR of 5.3%, from $5.2B in 2010 to $8.3B in 2019.
(Source: Company Investor Presentation)
What’s more impressive is that through investments in technology and operating efficiencies, FNF has also steadily improved its margins to 16.3% in the latest fiscal year. This has helped the company grow its operating income at a faster rate than revenue. This is demonstrated by FNF’s operating income growth, from $607M in 2010 to $1.47B in 2019, representing an impressive 10.4% CAGR over this time frame.
More recently, COVID-19 has been a key risk factor, as it resulted in a 6% drop in revenues back in Q1’20. However, as seen below, revenue quickly bounced back during Q2, with $2.4B in sales, representing an impressive 13% YoY growth.
(Source: Created by author based on company financials)
This YoY increase in revenue was helped by a wave of refinance activities due to low interest rates, which, according to management, were up 111% compared to the prior-year quarter. One risk factor that investors should be mindful of, however, is the recent announcement by Fannie Mae (OTC:FDDXD) and Freddie Mac (OTCQB:FMCC) that, starting in September, a 0.5% fee will be applied to mortgage refinances. While it remains early to be seen whether lenders will absorb this cost or pass it onto borrowers, it is something that could put a damper on future refinancing activity.
This risk is mitigated by the fact that title insurance sales related to purchases have taken a greater share of the overall revenue over the recent years. As seen below, mortgage originations related to purchases have trended up every year, and made up well over half of the company’s title insurance business last year.
(Source: Company Investor Presentation)
The increase in purchase activity appears to be supported by a report published earlier this month by the U.S. Census Bureau, which stated that U.S. home ownership increased year over year from 64% to 68%. This represents the highest level since 2008, and is one of the largest increases in history. I view this as a big positive for FNF. As the leading title insurance company, it is in a strong position to inevitably benefit from the increased purchase and refinance transactions down the line, as a result of elevated home ownership levels.
Meanwhile, it appears that the market has not taken notice of both FNF’s strong recent performance and the tailwinds that it has from increased home ownership levels. As seen below, the share price has generally held steady in the low $30s since the middle of June. At present, the share price sits comfortably below the 200-day moving average of $36.34, and far below the 52-week high of $49.28. I view the share price underperformance as being largely unwarranted, given the resiliency of the U.S. housing market and the increased home ownership levels.
Lastly, I view FNF’s acquisition of its remaining stake in F&G, a leading provider of annuities and life insurance, as being a net positive for the company, as it helps the company to diversify its revenue stream. It also appears that the F&G acquisition will be accretive to FNF’s earnings, as the CEO noted on the latest conference call (emphasis added by author):
F&G had strong sales for the quarter and as a result of the acquisition, F&G was recently upgraded by multiple rating agencies and achieved a major distribution milestone by successfully expanding into the financial institutions channel. We continue to expect the transaction to be more than 10% accretive on a pro forma basis to FNF’s 2020 earnings per share and 20% accretive on a pro forma basis to FNF’s 2021 earnings per share.”
Looking ahead, I’m encouraged by the latest EPS estimate of nearly $4.00 for next year, which appears to take into consideration the positive housing trends, earnings accretion from F&G, and FNF’s leading market position.
Fidelity National Financial is a leading provider of title insurance and transaction services to the real estate and mortgage industries. Its recent results show that the business has rebounded nicely since the start of the pandemic. Longer term, I see the elevated home ownership level in the United States and the F&G acquisition as being strong tailwinds for the company. For these reasons, I have a Buy rating, as I see shares as being undervalued at the current price of $33.10 and a low P/E ratio of 8.9, which sits well below its 12-year normal P/E of 13.5.
(Source: F.A.S.T. Graphs)
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FNF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.