2023-09-11 12:59:15 ET
Summary
- Fidelity National Financial (FNF) is rated Sell today, more bearish than the consensus from analysts and the quant system.
- Positives: dividend growth & stability / 4% dividend yield, financial health of company.
- Headwinds: overvalued vs sector, decline in YoY earnings, share price is +$10/share above the spring price dip and well above the moving average.
- Firm is heavy in title insurance which is affected by the mortgage slowdown, but it also has launched several real estate tech innovations which have been discussed.
Research Summary
Today I'll be rating Fidelity National Financial ( FNF ) , in the financials sector, subsector of insurance.
It had its Q2 earnings result on Aug. 8th and I will do a deep dive into some of that data.
For readers less familiar with this company, according to their website they are involved with title insurance, mortgage & real estate services, real estate tech, annuities & life insurance. Its stock trades on the NYSE.
Two key peers of this company are American Financial Group ( AFG ), and CNA Financial ( CNA ).
It's important to note that this company is not the same firm as or affiliated with Fidelity Investments , a large brokerage firm in the US that is a privately-held company.
Rating Methodology
Using a process similar to 5 project phases in project management, I break down my overall holistic rating of this stock into 5 categories I rank individually and of equal weight: dividends, valuation, share price, earnings growth, financial health.
If I recommend this stock on at least 3 of 5 categories, it gets a hold rating. 4 of 5 gets a buy, and less than 3 gets a sell rating. Then I compare my rating to the consensus from analysts, Wall Street, and the quant system.
Dividends
In this category, I will analyze the dividends of this stock and whether I think they present an opportunity for dividend-income investors. The data comes from official Seeking Alpha dividend info .
As of the writing of this analysis, the forward dividend yield is 4.21% , with a payout of $0.45 per share on a quarterly basis, with an upcoming ex-date being on Sept. 14th, a potential opportunity to take advantage of. This yield gets my attention as it is nearing the 5% mark, however let's see how it compares to its peers.
When comparing to its sector average, this dividend yield is 7.60% above its sector average. I believe this is a positive point to consider for dividend investors who are comparing multiple stocks in which to invest or comparing this stock to its overall sector.
Dividend yield is one of the metrics I look at, though not the only one, because it can indicate how much I can yield in dividend income that year vs the capital I actually invested.
Fidelity - dividend yield vs sector average (Seeking Alpha)
Another factor I look at is dividend growth over a longer period. In looking at the 5-year dividend growth for this stock, it has shown a positive upward trend.
This is, in my opinion, a positive point for dividend investors and a sign of this firm's capacity to return capital back to shareholders, which I believe is a sign of ongoing financial strength, though not a guarantee of future dividends, however.
Additionally, I am looking for stability with dividend payouts, and this stock has shown regular dividend payment history lately, which is a positive point to think about. Again, more signs of stability for a dividend investor counting on the recurring quarterly income.
I like to equate it to not just buying shares in a company but investing into an existing "income stream", in a way like buying into a piece of real estate with existing rental income pouring in regularly, but without the property repairs.
On the whole, I would recommend this company on the category of dividends. Later in the section on share price, I will show how this dividend income can be used in an investment idea for this stock.
Valuation
In this category, I will analyze the valuation of this stock. The data comes from official valuation info on Seeking Alpha, specifically the forward P/E ratio and forward P/B ratio, the key metrics I look at.
This stock has a forward P/E ratio of 16.53, which is 72% above its sector average. Unlike with dividend yield, in this category I believe it is actually a negative to have a valuation much higher than the sector you are in.
I think that a reasonable forward price to earnings for this stock would be between 8x earnings and 11x earnings, to stay within a reasonable 2-point range of the average. In this case, on this metric the stock appears overvalued vs its overall sector by a lot, even earning a "D" grade from Seeking Alpha which does not impress me as an analyst.
Fidelity - P/E ratio (Seeking Alpha)
This stock has a forward P/B ratio of 1.66 , which is 68% above its sector average . I think that a reasonable price-to-book value for this stock would be between 0.50x book value and 1.5x book value, to stay roughly within a 2- point range of the average. In this situation, this stock appears modestly overvalued vs its overall sector.
Fidelity - P/B ratio (Seeking Alpha)
Let's take a look at one of its peers mentioned earlier: American Financial Group , which I also rated not long ago. If comparing the two, AFG has a forward price-to-earnings that is 9.8% above the sector average and a forward price-to-book that is 128% above the average. So, it seems much more overvalued than Fidelity when it comes to forward price to book value. Incidentally, I did not recommend that stock either in the category of valuation.
Based on the examples I gave, I also would not recommend Fidelity on the basis of valuation, and am waiting on those levels to normalize.
Share Price
In this category, I will use a very simple investment idea to determine if the current share price presents a value buying opportunity right now or not, depending on my goals for return on capital, holding period, and tolerance for capital loss.
First, I pulled the stock chart (as of the writing of this article, so the price shown is not real time!) which shows a share price of $42.80, compared to its 200-day simple moving average "SMA" of $37.80 , over the last 1 year period.
Right off the bat, the current share price already appears somewhat overbought, when comparing to the moving average.
At the same time, the massive dip this spring during what appears to be the regional banking so-called crisis may have been a much better buy opportunity this year, I think.
In determining what my goal is for return on capital and what my risk tolerance is for capital loss, I decide to place a fictitious buy order of 10 shares at the current price, hold for 1 year so I can earn a full year of dividend income, and sell in Aug. 2024 at a capital gain if I can, or take an unrealized capital loss if I have to.
The goal is a +10% return on capital, and the loss tolerance is a -10% unrealized capital loss.
In the above example, I missed my profit goal by 8.64% and also exceeded my loss limit by 6.31%.
With that said, the current share price does not present a buy opportunity and in my opinion I would not recommend it.
This trade scenario above may not fit all investors' goals or risk profiles, so consider it just a rough framework to test a longer-term gain/loss scenario by tracking price movements in relation to the 200-day moving average which I think is a good long-term trend indicator.
Earnings Growth
In this category, I examine the earnings trends comparing the most recent quarterly results to the same quarter a year ago.
On a YoY basis, this firm showed positive growth in top line revenue however it seems to me it was helped by a tailwind to interest income and lower losses on sale of assets, even though their core business which is insurance seems to have had a YoY decline in premiums, based on the chart below:
On a YoY basis, the firm showed negative growth in net income and EPS, according to the income statement . This does not give me a lot of investor confidence in this stock, but also opens the door to more questions.
On further investigation into their Q2 earnings commentary , it seems the title insurance segment took a hit that quarter.
The results reflect Title’s considerable decline in volumes as compared to the prior year given higher mortgage rates, partially offset by higher average fee per file.
A short-term area of concern for this firm, as echoed by their CEO William Foley, revolves around the real estate sector, which is a major space this firm operates in.
the near term continues to be uncertain given the high level of interest rates which could persist for longer than expected.
His sentiment can be easily confirmed just by looking at the current probability of Fed rates staying the same after their September meeting, according to CME Fedwatch .
Looking for earnings diversification from this firm, I see they also have an F&G business segment that deals with insurance solutions serving retail annuity and life customers and funding agreement and pension risk transfer institutional clients.
This segment did not do much to offset the losses in title insurance, as it also appeared to be loss-making in Q2:
Net sales of $2.2B for the second quarter, a decrease of 12% from $2.5B in the second quarter of 2022.
Based on this evidence, I would not recommend in this category, and looking forward I think some of these headaches will continue in Q3 and Q4 for this firm.
Financial Health
As this company did not have a graphical quarterly presentation, I will keep this brief and zero in on some relevant points in this category.
First, one positive I want to highlight is a recent upgrade by a major rating agency.
According to comments by Chris Blunt, the head of the F&G division:
Our recent financial strength ratings upgrade to ‘A3’ by Moody’s is not only a strong validation of our financial performance but will also be a tailwind to our institutional markets business over time.
Usually I think a sign of capital strength is the ability to return capital back to shareholders by repurchasing shares and payout of dividends, and this company continues to do both without interruption so far.
According to Blunt:
We repurchased 790,000 shares for $16.4MM during the second quarter, under our $25MM share repurchase authorization.
Company CEO Foley also reiterated the strong cash position of the firm:
We continue to focus on balance sheet strength having ended the quarter with $885MM in cash and short-term liquid investments which positions the Company for an uncertain environment. Looking forward, we remain committed to our quarterly cash dividend though we have prudently moderated our share repurchase activity in order to preserve our financial flexibility.
In addition, its balance sheet shows positive equity each quarter going back several years, and also important to mention is the trend of positive cashflow and cashflow per share for several quarters:
Based on a holistic view of the evidence, I would recommend the stock in this category, and I expect the positive trend to continue for Q3 when it comes to the balance sheet.
Rating Score
Today, this stock was recommended in 2 of my rating categories, earning a sell rating from me today. This is actually more bearish on this stock than the consensus from analysts and the SA quant system, as seen below:
Fidelity - rating consensus (Seeking Alpha)
A sell rating, however, should not be considered a negative outlook necessarily, since those investors that bought at the spring price dip by now are already seeing $10/share in unrealized gains, when you look at the chart I used.
This also does not mean the price will not continue to go up, and I will discuss that potential in the next paragraph!
My Rating vs Upside Risk
My bearish rating can face an upside risk as follows:
What could make my rating seem too cautious and not bullish enough on this stock is something that could cause investors to continue pushing the share price up, and that is the technology innovations this firm is offering beyond just being a title insurance company.
For example, another SA analyst, Building Benjamins , brought up a recent acquisition Fidelity made this year by acquiring Titlepoint, in an Aug. 17th analysis :
TitlePoint is a property information research technology that utilizes proprietary tools to ensure no hidden property claims on a title before insurance is underwritten. This can significantly reduce the risk and payout ratio of premiums on title insurance. TitlePoint additionally contains OrderPoint, an order management software for realtors for creating and transferring titles.
Additionally, head of the Title business segment Mike Nolan in the Q2 comments also highlighted the leaps the firm is making in tech:
Our inHere platform is an area where we have been investing in recent years and is quickly gaining traction, having had over 1.4MM users on our platform over the last two years and nearly 90% of our 200,000 real estate professionals active in the last 30 days.
I believe if it continues to out-innovate its competitors and peers, that could potentially have some upside risk from investors & analysts seeing value in that and continuing to acquire more shares, especially if bigger investors (whales) plow capital into this stock for the above reason.
However, despite that risk, my sell rating remains as I believe continued slowing demand in mortgages due to exorbitantly high interest rates will keep a grey cloud over companies heavy into the real estate & title insurance space who depend on mortgage volumes. I also think the big financial media will continue with stories of headwinds in the mortgage business.
My perspective was supported by a late July article in CNBC which highlighted the YoY drop in mortgage applications:
23% lower than the same week one year ago, when rates were in the mid 5% range. The decline in purchase activity was driven partly by a 10% drop in FHA applications. The Federal Housing Administration, which offers low down payment loans, is favored by lower-income buyers. Clearly, the market is becoming less and less affordable for them.
Analysis Wrapup
To wrap up today's discussion, here are the key points we went over:
This stock got a sell rating today.
Its positive points are: dividends, financial health of company.
The headwinds it faces, and 3 reasons I think it is a sell opportunity right now, are: valuation, current share price, earnings YoY declines.
U pside risks have been addressed.
In closing, I don't recommend adding this stock to a watchlist of financial sector stocks, at least not for this quarter, but perhaps in a later quarter. The subsector itself, insurance, is still of interest to me as I have mentioned in prior articles, but at the same time readers should also pick & choose carefully among insurance stocks, as well as take a closer look into what types of insurance are a major part of a firm's business lines, since title insurance & exposure to the current real estate market conditions are not quite the same as a firm with a major auto insurance segment, or one that also happens to have other diversified segments like a mutual funds business.
For further details see:
3 Reasons To Sell Fidelity National Financial