Summary
- Fidelity National Financial experienced a significant boost in stock price, due to steady declines in mortgage rates.
- CPI came in hotter than expected, possibly causing a larger number of upcoming interest rate hikes, which can negatively impact the business.
- Q4 EPS estimate of $1.16 might be a bit high, EPS above $1 would impress me with mortgage rates at decade highs.
- Despite the challenging environment, investors should not forget the historical undervaluation of FNF stock.
Fidelity National Financial ( FNF ) and industry peers have made a spectacular comeback in the last months. Stewart Information Services Corp. ( STC ) has been the laggard of the group after a larger than expected miss on earnings at the end of October and now recently in February. On the other hand, First American Financial Corporation ( FAF ) exceeded earnings estimates two quarters in a row, therefore topping the chart in terms of performance. But longer interest rate hikes might temporarily stall the fun we have had so far.
Mortgage Rates On Decline
The fast paced increase of mortgage rates created peak bearishness in November 2022, which resulted in a great buying opportunity. On the 3th of December, I wrote a "Strong Buy article for Fidelity National Financial", thus far it has outperformed the S&P 500 by 17%. The strong stock performance has been caused by a steady decline of mortgage rates. The reason behind lower mortgage rates has to do with a more dovish Fed (Federal Reserve).
In my latest article I mentioned:
The Fed has been raising interest rates from 0% back in 2020 to 3.75%, consequently mortgage rates have been spiking as well. If the Fed increases interest rates, the banks pay more interest and need to increase base rates for loans to maintain a profitable business. Therefore, buying a house is less attractive with a mortgage rate sitting at 6.5%. Accordingly, Fidelity's revenue stream in title insurance has been lower, due to a weaker mortgage origination industry.
Nevertheless, It is too early to cheer, the January CPI report came out hotter than expected. Year over year, the core consumer price index number climbed 5.6% vs 5.5% expected. Even, month over month CPI saw a rise of 0.5%. Therefore, we should expect some more interest rate hikes of 0.25% and a pause in rate hikes might have to wait a bit longer. This is not a positive catalyst for Fidelity Nation Financial, as a large percentage of revenue depends on the title insurance of new purchased homes.
FNF Stock Valuation
However, the stock maintains a 40% discount compared to the average price-to-earnings. It is true that earnings will decline in the following quarters year over year, but the CEO of First American Financial had some promising words for the sector on the latest earnings report in February 2023:
Although current market conditions remain difficult, we are seeing early indications of stabilization in the purchase market.
If the company manages to stay in line with analyst expectations, then Fidelity remains the cheapest stock in the sector with a price-to earnings ratio of 8.5.
Fidelity National Financial Q4 Earnings Preview
On the 22th of February, Fidelity National Financial will report earnings after the market close. For the upcoming quarter, earnings per share ((EPS)) estimates are standing at $1.16 vs $1.07 (last quarter) and the revenue estimate at $2.98 billion vs $3.21 billion (last quarter).
Personally, I think the EPS estimate is set a bit high. If we look at FAF 's EPS, they went from $1.62 (Q3) to $1.35 (Q4), this does not look promising for FNF. Nonetheless, ORI did manage to beat Q4 EPS and did increase earnings from $0.68 (Q3) to $0.80. An earnings beat is in the hand of the management team and their efforts on cutting back on expenses. Still, an EPS above $1 would satisfy me.
Considering the decade high mortgage rates, the company is holding up extremely well in terms of earnings. In 2013, the mortgage rates increase from 3.40% to 4.50%, where a lot more impactful. FNF has grown more resilient over the past years.
Spinoff
Further, F&G Annuities & Life ( FG ), Fidelity National Financial' spinoff is experiencing a lot of investor interest and is closing in on the initial offering price. Last week, I sold my position in the company, which I received as dividend through FNF. It is interesting to keep following the spinoff, as FNF still owns 85% of the company. When the dividend yield nears that of FNF's again due to a decrease in FG's stock price, I will consider starting a reasonable position.
Takeaway
I believe Fidelity National Financial stock remains Buy worthy. In the coming months, the stock market will be busy trying to figure out where interest rates are going, consequently this might be a stagnant period of price action in FNF. Nonetheless, long-term investors should keep in mind the undervaluation of the stock on a historical basis and compared to peers.
The dividend yield is attractive above 4%, which does easily beat the yield of the S&P 500. In Q4, there is a high chance management has carried on with share buybacks, if not even increased them considering the low prices in November and December. Currently, I am maintaining my 6% allocation in FNF.
For further details see:
Fidelity National Financial: Still Buy Worthy After A Quick Recovery In Price