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Published: June 29, 2010
Many investors have tired of positioning
their portfolios for a housing recovery. Consistently positive
growth trends are probably still a ways off, but there is no
denying that sales activity remains well below normal levels,
making a recovery a matter of not if, but when it occurs.
But rather than investing in homebuilders like KB Home (NYSE:
KBH) or DR Horton (NYSE: DHI), or even the SPDR
S&P Homebuilders ETF (NYSE: XHB), I think I've found a
better way to go...
Just like car insurance, title insurance is a necessity for
buying a home. A buyer is required to purchase the insurance to
protect against a prior ownership claim that would make a sale
impossible. These claims can arise from forgeries,
misrepresentations, incorrect legal descriptions and even simple
errors made when closing on a house.
Simply put, this is a business that benefits every time a home
is bought. And the great part about it is that claims for title
insurance are rare, so the companies in this industry pocket
most of the premiums. One company, in particular, looks to be
the best bet for investors.
Fidelity National Financial (NYSE: FNF) has used the
historic downturn in the housing market to its advantage. In
late 2008 it acquired many assets from archrival LandAmerica,
which had fallen into bankruptcy as a result of the housing
collapse that began to build steam in 2006. The LandAmerica
units folded into Fidelity National's existing franchises
(Fidelity National Title and Chicago Title) were stodgy but
important names, such as Lawyers Title Insurance Corp.,
Commonwealth Land Title Insurance Co. and United Capital Title
Insurance Co.
Fidelity National now lays claim to being the largest title
insurance company in the nation, with a
market share
close to 46%. The company's scale helps it lower costs and
better manage cyclicality in the housing industry, as the
industry is still recovering from the bursting of what will
likely turn out to be the biggest housing bubble in history.
Residential title insurance constitutes the majority of Fidelity
National's business, though it also operates on the commercial
side of the market.
Provisions for claim losses only made up 7%
of Fidelity National's total expenses last year. Personnel and
other costs to operate 1,600 offices and pay sales commissions
to 7,500 insurance agents across the United States are
substantial, but profit margins (in the mid single digits) are
still respectable and should rise as synergies from the
LandAmerica acquisition are realized.
The firm remains solidly profitable during a difficult operating
environment and still had enough cash to raise its
dividend to $0.18 a share last quarter, equating to a
trailing
yield of about 5.0%. Better yet, its leadership position in
the industry means it will garner the lion's share of an upturn
and will eventually see a solid boost to operations once the
industry stabilizes to more historic levels. Additionally,
Fidelity National plans to boost its specialty insurance lines,
such as flood, home warranty and other personal lines. These
businesses are generally smaller but can be very profitable.
Fidelity National should continue to consolidate market share.
LandAmerica will likely be the largest and most opportunistic
deal the company ever makes, but future deals are not out of the
realm of possibility. Fidelity National has a history of
acquisitions aside from Land America, such as when it bought
Chicago Title in 2000 -- in the midst of another market
downturn. New deals are unlikely to have a dramatic impact given
Fidelity's size, but bolt-on acquisitions can easily add a
couple of percentage points to organic growth.
Action to Take ---> In terms of valuation, Fidelity National
currently trades slightly below its most recent quarter-end
book
value of $14.46 a share. That means investors are essentially
paying nothing for future earnings that Fidelity National posts.
Earnings are unlikely to come close to the more than $3 a share
earned in 2005, but the addition of LandAmerica's assets and an
inevitable improvement to industry conditions could easily send
the company's
return on equity (ROE) back to the double digits.
An improved ROE equates to about $2 in earnings, and a low
double-digit multiple off those earnings implies the stock can
eventually double from current levels.
An investment in Fidelity National requires a bit of patience
because the housing market has yet to show signs of a
sustainable recovery. Glimpses of growth abound, but May was a
horrific month in terms of new sales due to the April 30th
expiration of a government homebuyer tax credit. It won't be
long before real estate activity perks up for good, which could
send Fidelity National's stock up significantly.
-- Ryan Fuhrmann
Contributor
StreetAuthority |
