Thursday, April 30, 2009

First American (FAF) Beats by a Mile

Let me preface this by saying one of our favorite hedge fund managers Doug Kass has shorted the title insurer group as of yesterday... mixed results thus far. He was once short Allegiant Travel (ALGT) when I owned it - and it went down hard right after his call as I assume many people follow his trades. But as you can see by the chart, over time it surged and long term value was appreciated. So we were "both right" - he in the short run, me in the long run. But the stock market nowadays is all about the short run trade...

I believe the same here - no change to thesis but due to his charging into them as shorts I did cut back both positions we own... in fact both stocks were down yesterday in a good tape so I assume he made his call pretty early in the day. I don't know what time he posted his short but when certain people make calls, and others follow the trade - it matters. In fact it caused FNF to drop below the 50 day moving average... so due to chart alone I had to pullback. If FNF regains that key line I'll get back what I sold - his call might of just been for 24 hours or 5 weeks; who knows.

With that said, First American (FAF) reported last night and as expected - they had the same good data as Fidelity National Financial (FNF) but without the acquisition costs that clouded the positive numbers. [Fidelity National Financial Misses; Underlying Metrics the Real Story] FAF is more messy as it has multiple business lines - so in one you have more of a pure play but with a lot of acquisitions clouding the near term, and the other is a hybrid of multiple business lines.

First American beat analysts expectations by 12 cents; a look at their report
  • Total revenues for the first quarter of 2009 were $1.4 billion, a decrease of 17 percent relative to the first quarter of 2008. Net income was $36.0 million, or 38 cents per diluted share, compared with $29.3 million, or 32 cents per diluted share, in the first quarter of 2008.
  • All five business segments improved pretax earnings and margins relative to the fourth quarter of 2008
  • Corporate expenses were $27.4 million during the first quarter, a 26 percent decrease relative to the prior year (chop chop chop) Title Insurance and Services segment employee reduction of 365 during the quarter is expected to result in annualized savings of $21.4 million (the workerless future - productivity reigns; and this is in a BOOMING sector) Forty-one title insurance office closures are expected to yield $1.9 million of annualized savings
  • Increased order volumes across all mortgage-related businesses relative to the fourth quarter
  • Parker S. Kennedy, chairman and chief executive officer of The First American Corporation. "The company benefited from a surge in origination and default-related transaction activity, as well as continued expense reductions. Low mortgage rates and the effects of recent government actions should help to create a healthy operating environment in 2009."
  • Average daily open title orders increased 47 percent relative to the fourth quarter (massive)
Almost word for word with Fidelity National on this piece
  • "Our Title Insurance and Services segment experienced a substantial increase in open orders and we continued to improve operating efficiency," stated Dennis J. Gilmore, chief executive officer of the company's Financial Services Group. "Orders are taking longer to close as a result of the backlog in the mortgage lending industry, but we have a strong inventory of orders that are expected to close in the second quarter. We expect significant margin expansion in the second quarter."
There are 5 business segments but just under 60% is title insurance so we'll focus on that area; the other 4 businesses sort of offset each other this quarter.
  • During the first quarter of 2009, total revenues in the Title Insurance and Services segment were $792.4 million, a 26 percent decrease from the same quarter of 2008. Factors contributing to these results were a decline in the number of title orders closed, a decrease in the average revenue per order closed and the termination of certain agency relationships. The company's direct operations closed 369,200 title orders for the first quarter of 2009, a decrease of 5 percent, when compared with 389,600 title orders closed in the first quarter of 2008. Average revenue per direct title order was $1,248, a 15 percent decline relative to the first quarter of 2008.
  • Salary and other personnel costs were $269.3 million, a 23 percent decrease, compared with the first quarter of 2008, primarily due to employee reductions.
So an interesting story - this is a big company with 30,000 employees; so they really only cut 1% of workforce. Closing 41 offices helps with some savings as well. Due to seasonality it is hard to compare sequential quarters (Q1 2009 v Q4 2008) ... after all this is housing; and unlike the main stream cheerleaders I won't blow smoke by cheering a number that says March is better than December... March is ALWAYS better than December in the real estate market. Expectations were low; they beat them - and like Fidelity National they are seeing major order flow now and down the pike and cited the same backlog in the industry.

So rejoice America - just as we had in 2004-2006 an army of mortgage specialists shall lead us forward out of the unemployment black hole. Start training.

Long First American, Fidelity National Financial in fund; no personal position

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