Summary
- With the Fed likely continuing its accommodative policy, we expect the FNF business to benefit.
- We believe that Stewart acquisition is on track to be closed, despite some reservations from the Street.
- We expect moderate upside in revenue during 3Q, which will be largely offset by larger SG&A expenses.
Basic Business / Product Analysis:
Fidelity National Financial (FNF) is a provider of title insurance, escrow and other title-related services, including trust activities, trustee sales guarantees, recordings and reconveyances and home warranty products, as well as transaction services to the real estate and mortgage industries. FNF issues more title insurance policies than any other title company in the US. The company provides services mainly ServiceLink, which is key to facilitating of production and management of mortgage loans. FNF consists of two core segments: 1) Title, which focuses on title insurance underwriters and transaction services business and 2) Corporate, which focuses on real estate technology subsidiaries.
Valuation: We believe that the case of falling rates should give FNF a 2x PE multiple premium, providing an edge over the industry-wide multiple (some would claim that FNF is actually THE industry, given the extent of their title outreach) of 14x. Historically, during the period of sharply falling rates, FNF's title business significantly outperforms with "catch-up" mortgage borrowers, which is the key reason to support our higher multiple, even when EPS estimate may be fairly in line with consensus. When we apply the resulting 16x multiple to our 2020 EPS estimate of $3.19, we get the target price of $51. This is only 10-12% upside from FNF’s current levels; however, as we get more comfortable with our estimates after 3Q and 4Q earnings call, we may revise our bottom line estimates higher.
Key Immediate Tailwinds:
There are three core reasons that drive our relatively bullish near-term thesis on FNF.. There is also one point of caution that we raise.
