Direct-to-Consumer Focus Will Strengthen Home Warranty Segment In 2024

Key Takeaways

• Anticipated growth in purchase and refinance orders in 2025 could drive recovery in the residential market and boost the Title segment.
  
• Strategic investment rebalancing and increased direct-to-consumer focus in Home Warranty expected to enhance profitability and net margins.
  
• The downturn in residential markets and high mortgage rates pose risks to revenue and margins, compounded by market volatility and natural disaster threats.

Catalysts

Through its subsidiaries, provides financial services.

• First American Financial expects growth in purchase and refinance orders in 2025, indicating a potential recovery in the residential market. This could positively impact revenue growth in the Title segment.
  
• The strong performance and expected continued strength in the commercial business, highlighted by significant revenue growth, may drive increased revenue and profitability for the company.
  
• Strategic investment portfolio rebalancing has improved investment income, which, even amidst 3 Fed rate cuts, has exceeded expectations. This is likely to bolster earnings in the Title segment.
  
• Increased focus and investment in the direct-to-consumer channel in the Home Warranty segment, with over 40% of 2024 contracts coming from this channel, are expected to enhance profitability and improve net margins over time.
  
• With the strategic portfolio rebalancing expected to add $42 million to investment income in 2025, this could contribute to improved margins and earnings growth.

First American Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First American Financial's revenue will grow by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 8.4% in 3 years time.
• Analysts expect earnings to reach $698.5 million (and earnings per share of $7.02) by about March 2028, up from $131.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.2x on those 2028 earnings, down from 51.5x today. This future PE is lower than the current PE for the US Insurance industry at 14.1x.
• Analysts expect the number of shares outstanding to decline by 0.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.66%, as per the Simply Wall St company report.

First American Financial Future Earnings Per Share Growth

Risks

• The ongoing downturn in the residential purchase and refinance markets, driven by low inventory, high home prices, and mortgage rates around 7%, poses a risk to revenue growth despite modest improvements anticipated in 2025.
  
• Exposure to market volatility and the broader economy adds uncertainty to growth expectations in the commercial business, potentially impacting revenue stability and growth.
  
• High mortgage rates keeping refinance volumes at low levels may continue to negatively affect the contribution of refinance revenues to the company's overall revenue and margins.
  
• The negative impact of rising interest rates on investment income, despite strategic gains from portfolio rebalancing, could result in a headwind for earnings growth.
  
• Risks from natural disasters, such as the wildfires affecting the Los Angeles area, can lead to unforeseen expenses and potential revenue disruption, which could impact net margins.

Valuation

• The analysts have a consensus price target of $76.2 for First American Financial based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $86.0, and the most bearish reporting a price target of just $69.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.3 billion, earnings will come to $698.5 million, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 6.7%.
• Given the current share price of $65.7, the analyst price target of $76.2 is 13.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.