2023-08-29 04:40:39 ET
Summary
- Investors Title Company has solid margins and a market cap of just under $300 million.
- ITIC operates in the title insurance business, offering both residential and commercial title insurance.
- The company's written premiums have been falling due to poor sentiment in the real estate market, but there is potential for growth if interest rates decrease.
Introduction
In the title insurance industry, Investors Title Company ( ITIC ) has managed to grow rather well over the years and the market cap sits at just under $300 million currently. The company has managed to achieve quite solid margins which seem to have led to the slight premium you have to pay for the company right now. However, I find the growth prospects somewhat muted, and paying a premium with that in mind I think you aren't getting the best possible deal here. An earnings discount of around 10 - 15% to the sector would make ITIC far more appealing to invest in. With that said though, the business is solid and there isn't enough of a reason here to make for a sell case in my opinion and this finally leads to me issuing a hold rating for ITIC right now.
Company Structure
As mentioned, ITIC operates in the title insurance business and has been doing so since its founding year in 1972. The company has managed to grow its bottom line quite efficiently on a YoY basis and in the last quarter, it reached $7.6 million. This still leaves an FWD p/e of above 11 for the company.
More specifically about the operations of the company, the focus lies in offering both residential and commercial title insurance for a variety of customers and clients in the United States. The company underwrites land title insurance for both owners and mortgagees as a primary insurer which has given the company its current market position as the broad coverage is appealing to most. The company also assumes some of the risks as it takes on the reinsurance of title insurance from other title insurance companies in the industry.
Income Statement (Earnings Report)
Looking at the revenue statement from the company we can see that the written premiums for the company have been falling quite rapidly on a YoY basis and in Q2 of 2023 it landed at $44 million, down from $69 million a year prior. This shift has come from the poor sentiment in the real estate market as rising interest rates are slowing down momentum and activity. But what is the bull case here is that as soon as the interest rates start to go down, more activity will follow and ITIC will once again begin to generate similar revenues as last year. I tend to be a bit more skeptical and I find it still quite likely that rates will remain rather elevated for an extended period and that dulls out the buy case for ITIC enough to make it a hold instead.
Earnings Transcript
I think it important to get some comments from the management of the business and in the last earnings report Chairman J. Allen Fine said the following about the quarter:
Regardless of current market conditions, the strength of our balance sheet affords flexibility in the execution of our business strategy. We continue to pursue opportunities to expand our presence, enhance operational capabilities, and position ourselves for profitable growth over the full real estate cycle".
Seeing the management confident in their position further elevates the investment case in my company, but what still keeps it from being a buy is the valuation in my opinion. The balance sheet of ITIC is sound as they have a very liquid position right now with over $100 million in short-term investments and nearly $60 million in fixed maturity securities that are available for sale at a fair value currently. That is over half of the current market cap for ITIC right now and based on a p/b metric the company doesn't look too expensive as the multiple is just 1.16 right now.
Valuation & Comparison
GGM Model (Author)
ITIC isn't necessarily a dividend play right now, but rather a speculative stock that hopefully will appreciate as interest rates go down and their net written premiums can increase because of an increase in demand. For now, though, the GGM model above highlights some of the issues with the current price if you want to get a strong required return. The dividend hasn't necessarily been increased that quickly in the last several years and that does worry me somewhat. But I hope that if net margins can increase to above 11 - 12% then the company will have more incentive and capability to grow the dividend at a yearly rate of 5% perhaps, and the ITIC is starting to look more enticing.
Looking at a peer like Root, Inc. ( ROOT ) for example it seems that ITIC has done a far better job so far in ensuring they have a profitable bottom line and can deliver a dividend. On an earnings metric it's difficult to compare as ROOT has yet to produce a positive net margin, which makes ITIC out to be the clear winner in my opinion. Given the poor profitability, ROOT has also been given a lower p/s than ITIC which shouldn't be construed as a good thing, rather it's a reflection of the risks associated with the company. The p/s for ROOT is 0.52 and for ITIC over 1.1. In conclusion, though, I think because ITIC is able to produce a positive net margin, it is the winner based on fundamentals alone.
Risk Associated
The trajectory of increasing interest rates casts a shadow over the housing market, where we anticipate a deceleration in purchase activity and a virtual standstill in refinance activity. This shift in market dynamics is already translating into a reduction in the issuance of title policies. As a result, we must acknowledge the potential for a significant impact on ITIC's earnings, with the possibility of a downturn in the short term.
Interest Rates (tradingeconomics)
In this scenario, the title insurance business, which is closely tied to real estate transactions, faces a challenging environment. The decline in both purchase and refinance transactions inevitably translates to reduced demand for title policies. This poses a direct threat to ITIC's revenue streams, with the potential to substantially impact its earnings.
In response to the traditional landscape of title insurance, a new approach is emerging for consumers seeking assurance about the title status of their properties: the 'Attorney Title Opinion Letter'. Although still relatively unfamiliar, this innovative concept has gained traction, offering an alternative path to establishing the integrity of property titles. The question that looms now is whether this approach will gain broader acceptance and become a staple in the real estate closing process.
Investor Takeaway
Right now I think that the price for ITIC is a bit too high to pay. The buy case rests on the that interest rates will eventually go down in 2024 and more activity in the real estate and title insurance market will commence. I am not as optimistic and think there is a clear risk that rates remain elevated and that makes a buy case somewhat dulled for ITIC unfortunately. This concludes me issuing a hold rating for ITIC right now.
For further details see:
Investors Title Company: Lower Volumes With An Earnings Premium