2023-11-02 09:50:00 ET
Summary
- Fidelity National Financial is the largest title insurance agency in the US and a leading provider of title-related real estate transaction services.
- The company's title profits are expected to decline by over 50% in 2023, but real estate transactions are a constant feature of the American economy, and FNF's title profits will normalize.
- FNF's title business is undervalued compared to its peers, and the company has the potential to monetize its data assets and become an independent provider of real estate transactions data.
The following segment was excerpted from this fund letter.
Fidelity National Financial ( FNF )
Fidelity National Financial (“FNF”) is the largest title insurance agency in the United States and a leading provider of title-related real estate transaction services. FNF also owns 85% of F&G Annuities, a life insurance and annuity business.
Real estate transaction volume is tied to the interest rate cycle; therefore, title insurers are cyclical and often dismissed as bad businesses. FNF’s title profits will likely decline by over 50% in 2023, a cyclical trough, versus profits in 2021, a cyclical peak. Lumpiness in FNF’s title profits is to be expected, yet investors over-extrapolate FNF’s earnings power to the upside and downside. Since 2021, FNF’s stock peaked at ~$50 per share and troughed at ~$32 per share, a greater than 60% dispersion in equity valuation (including share repurchase accounting but excluding spin-offs).
Though volume is cyclical, real estate transactions are a constant feature of the American economy and FNF’s title profits will normalize. FNF earns the highest title margins in the industry and remained profitable this year despite the challenging operating environment. This is important because title fees are regulated at the state and local level, restricting excessive take rates, so effective expense management is essential. Fee regulation entrenches the title market’s status quo because returns on capital are good but not high enough to justify new competition. Regulators and customers are most comfortable with existing providers because they are compliant with the regulatory landscape, reliable, possess the most data, have the deepest customer relationships, and constitute a tiny fraction of spend in the value chain.
Even though FNF’s title business is a clear industry leader with the highest market share, highest margins, and highest returns, it trades for the lowest multiple among its peers. We would argue the entire title sector, not just FNF, is undervalued. Though title insurance is currently the primary driver of customers to FNF’s value-added real estate transaction services, we also think of FNF as a nascent data business that over time could monetize its data assets by becoming an independent provider of real estate transactions data.
We believe Fidelity National Financial is an attractive investment because:
- Customer value proposition & durable market structure: most real estate in the United States is debt financed and thus requires title insurance. Title insurance is a tiny fraction of the real estate transaction value chain. The title insurance sector is concentrated among three firms, resulting in disciplined expense management and rational competition. As a result, even in 2023’s cyclical trough, all three players expect profitability. FNF is the largest provider in a concentrated market, with the strongest margins and returns.
- FNF’s cash flows are less cyclical after 2020 acquisition of life insurer: cyclical weakness in FNF’s title insurance business from high interest rates are somewhat offset by cyclical strength in FNF’s 85% ownership of F&G Annuities (NYSE: “FG”), a life insurance and annuity business. FNF acquired F&G in 2020 and completed a public spin-off of a minority stake in November 2022. Though looking through F&G’s spin-off impact on FNF is not complex, we think the market is overlooking the fundamental strength and value of F&G today due to noisy financial statements. On a combined basis, FNF’s cash flow profile is significantly less cyclical than a pure play title insurer. Steadier cash flows will enable FNF’s management to allocate capital effectively between its complementary segments.
- Alignment & strong capital allocation track record: FNF’s management owns more than $450M of stock. The company is led by William Foley, a talented owner/operator who has led FNF since 1984. Foley is an excellent capital allocator: as an example, consider that Black Knight Financial (just acquired by Intercontinental Exchange) and Fidelity Information Serviecs (NYSE: “FIS”) were both spun out of FNF. Over the last 18 months, FNF also spun-out a minority stake in F&G, and opportunistically repurchased shares of stock, taking advantage of the market’s mispricing.
- Attractive valuation: assuming market value for F&G, which we believe is too low given a trading discount for a low-float minority stake, FNF’s title segment trades at an implied 14% normalized free cash flow yield. On a combined basis, FNF trades at a P/E of ~8x 2024E EPS. We think FNF’s intrinsic value is greater than 40% above the current stock price.
Important DisclosuresSilver Beech Capital Management, LLC (“Silver Beech”) is a New York limited liability company that serves as the investment manager to Silver Beech Capital, LP (the “Fund”), a Delaware limited partnership. The principals of Silver Beech are James Hollier, who serves as the portfolio manager and managing partner of the Fund, and James Kovacs, who serves as the managing partner of the Fund. All performance results presented herein refers to the performance of an unrestricted investor in the Fund since its inception. Net performance is presented net of the highest performance allocation in effect at the time (20%) above a 6% hurdle rate, the highest actual management fees (1.0%) charged at the time, and net of other expenses, and includes the reinvestment of all dividends, interest, and capital gains. Performance for investors who subscribed on different dates, or who pay different fees would necessarily be different from the performance presented herein. The rate of return is calculated on a “time weighted” rate of return basis, which minimizes the effect of cash flows on the investment performance of the Fund. All monthly performance data presented herein reflects unaudited data, unless otherwise specified, and as such its accuracy cannot be guaranteed. Past performance is not necessarily indicative of future results. All securities transactions involve substantial risk of loss. The material presented is compiled from sources thought to be reliable, including in certain instances, from outside sources, but accuracy and completeness cannot be guaranteed. Any opinions expressed herein reflect the judgment of Silver Beech and are subject to change. The information in this letter is for discussion purposes only. Nothing contained herein should be construed as an offer to sell, or a solicitation of an offer to buy or sell any security or investment strategy or a recommendation as to the advisability of investing in, purchasing or selling any security or investment strategy, which may only be made in the Fund’s confidential offering memorandum and operative documents (collectively, the “Offering Documents”). Before making an investment decision with respect to the Fund, prospective investors are advised to read the Offering Documents carefully, which contain important information, including a description of the Fund’s risks, investment program, fees, expenses, redemption and withdrawal limitations, standard of care and exculpation, etc. Prospective investors should also consult with their tax and financial advisors as well as legal counsel. The Offering Documents are the sole documents on which a potential investor is entitled to rely in evaluating an investment in the Fund. The information in this letter does not take into account the particular investment objectives, restrictions, or financial, legal or tax situation of any specific prospective investor, and an investment in the Fund may not be suitable for many prospective investors. This letter is not intended to be, nor should it be construed or used as, investment, tax or legal advice. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. |
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Silver Beech Capital - Fidelity National Financial: Industry Leader Trading For The Lowest Multiple Among Peers