Why Is First American Financial (FAF) Down 17.8% Since Last Earnings Report?

It has been about a month since the last earnings report for First American Financial (FAF). Shares have lost about 17.8% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is First American Financial due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

First American Financial Q4 Earnings & Revenues Beat

First American Financial Corporation reported fourth-quarter 2019 operating income per share of $1.80, which outperformed the Zacks Consensus Estimate by 33.3%. Moreover, the bottom line improved 41.7%.

Increase in investment income and improved segmental performance were partially offset by increase in expenses.

Behind the Headlines

Operating revenues of $1.7 billion increased 22% year over year and beat the Zacks Consensus Estimate by 6.9%.

Net investment income grew 24.5% to $78.8 million.

Closed title orders increased 27%, attributable to 131% increase in refinance orders.

Average revenue per order decreased 8%, driven by the shift to refinance transactions.

Total expense of $1.4 billion increased 10.9% year over year, attributable to increase in personnel costs, premiums retained by agents, other operating expenses, premium taxes and interest.

Full-Year Highlights

Operating income per share of $5.76 outpaced the Zacks Consensus Estimate of $5.38. Moreover, the bottom line surged 25.8%.

Revenues of $6.2 billion increased 8% from 2018 and beat the Zacks Consensus Estimate by 1.8%.

Segment Results

Title Insurance and Services: Total revenues increased 21.1% year over year to $1.6 billion.

Pre-tax margin expanded 740 bps.

Direct open orders increased 24.4% to $251.7 billion while Direct closed orders increased 27% to $224.2 billion year over year.

Specialty Insurance: Total revenues increased 17.9% year over year to $131.6 million.

Pre-tax margin was 16.7%, much higher than 0.7% in the year-ago quarter.

Financial Update

First American exited 2019 with cash and cash equivalents of $1.5 billion, up 1.3% year over year. Notes and contracts payable were $728 million, down 0.5% year over year.

First American exited 2019 with stockholders’ equity of $4.4 billion, up 18.1% year over year.

Return on equity was 17.3% in 2019.

Cash flow from operations was $913.1 million, up 15% from 2018.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months. The consensus estimate has shifted 7.14% due to these changes.

VGM Scores

At this time, First American Financial has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

First American Financial has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.