Monday, April 27, 2009

Fidelity National Financial (FNF) Misses; Underlying Metrics the Real Story

Fidelity National Financial (FNF) missed their estimate relatively large but a somewhat muted reaction after hours - this is more of a multi year play on housing recovery so I am more interested in what they have to say than the numbers. That said I wish it was up 30% on a massive loss while the CEO says he sees stabilization - but we don't seem to own those type of stocks.

Analysts are just guessing at the numbers as the range was -0.05 to 0.31, and they basically hit the low end of the range with a 6 cent loss. MANY caveats I will lay out below since a very large integration was undertaken that slowed them down this quarter but will be a major tailwind as we move forward. This was a digestion quarter. The stock is down 50 cents in after hours but judging from the stock price I was thinking this sort of thing was being telegraphed. I cut back to about a 1.9% stake as the stock was at threat of falling below its 50 day moving average after testing it just about each day for 2 weeks straight. (i.e. not participating in the rally) I'd love to see a pullback to $16s to reload up.

Here are the results with the important commentary; I might be the only financial presence on the internet who actually cares about this result since tonight it's all about the (BIDU) economy. Keep in mind First National did a quite material acquisition so these are not organic numbers; and the "losses" are due to the acquisition
  • Revenue up from $1.13B to $1.36B
  • Earnings/loss from +$27.2M to -$12.4M (more on this later)
  • Cash flow from -$74.9M to +$128.3M (awesome)
In this quarter in 2008 they opened 562K orders and closed 308K orders
In this quarter in 2009 they opened 746K orders and closed 429K orders

So that's a 33% gain in opened orders and 39% gain in closed orders year over year (not organic though, partly due to acquisition)

This follows up on very positive comments they made a quarter ago [Feb 4, 2009: Fidelity National Financial Seems to be Turning the Corner] on a surge of titles changing hands... but even more good news it sounds like below
  • "The highlight of the first quarter was the continuation of the strong open order volumes that began in very late 2008," said Chairman William P. Foley, II. "The significant strength in refinance volumes has, however, caused an increase in the time it takes to close an order, as we really only began to see an increase in closed order volumes during the later part of the quarter. We expect that trend in increased closed orders to continue as we head into the second quarter.
  • Additionally, we saw a surge in open order volumes in the first three weeks of April, nearing their highest levels of 2009." (bodes well)
Update on acquisition
  • "We also made significant strides on the integration of the Lawyers and Commonwealth operations during the quarter, realizing run-rate cost savings of more than $231 million as of March 31, 2009, versus our original synergy estimate of $150 million and our revised synergy estimate of $225 million. Most importantly, the Lawyers and Commonwealth operations returned to profitability for the month of March, before the impact of the synergy bonus, and these underwriters are positioned to generate increasing profit margins as we enter the second quarter and beyond."
Financial impact of acquisition
  • "As we discussed during our recent equity offering, operating performance in our title business began the quarter slowly, but picked up as we got into the month of March. In January, we recorded a pre-tax loss of approximately $11 million, as the legacy FNF business was profitable, but the Lawyers and Commonwealth operations lost more than $17 million on a pre-tax basis. In February we recorded a pre-tax loss of approximately $5 million, as legacy FNF was again slightly profitable and the Lawyers and Commonwealth operations improved to a pre-tax loss of only $5 million. In March, we recorded $15 million in pre-tax earnings, but those results included a $20 million synergy bonus and approximately $6 million in other than temporary impairments related to several equity securities.
  • Before those two items, we generated approximately $41 million in pre-tax earnings, which we believe to be a more meaningful representation of our operating performance in March, as legacy FNF generated a high single digit margin for the month and the Lawyers and Commonwealth operations recorded a mid-single digit margin."
Effectively this was a messy quarter while they turned around the Lawyers and Commonwealth acquisition - it sounds like by March things were humming. That is actually a very quick time to turn around a business, so color me impressed. Hopefully next quarter we have no such issues.... but in a lemming market where all that matters to 98% of participants is the "headline" or " beat!" this sort of good news below the fold will go unnoticed.

Follow up on their share offering
  • "Finally, on April 20, 2009, we closed on a public offering of our common stock for net proceeds of approximately $331 million. There were two primary reasons for the issuance of stock. First, we will repay $135 million under our existing credit facility on April 30, 2009. We are also examining the option of repurchasing a meaningful amount of our existing bonds, both of which will reduce our debt to total capital ratio from approximately 32% to somewhere near 25%, a level more in-line with our historic debt to cap targets. This reduction in leverage will provide increased financial flexibility for FNF. Second, as the leading title insurance company in the country, we believe the strength of our balance sheet, including unrivaled claims reserves, shareholders' equity, investment portfolio and modest financial leverage, will allow us to differentiate ourselves in the marketplace, particularly in the commercial area."
I don't see anything to not like here - the good metrics were hidden below their acquisition costs and turnaround actions but this purchase makes them the giant in the field. By a mile. Judging from what they said ex-integration this should bode very well for smaller peer First American (FAF) which we of course, also hold.

[Dec 26, 2008: Ways to Play the Housing Boom - Title Insurers]

Long FNF, FAF in fund; no personal position

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