Stock analysis: Fidelity National Financial Inc

Intrinsic value analysis and projections.

Fidelity National Financial Inc. (Ticker: FNF) and its subsidiaries provide various insurance products in the United States.

The company operates through Title, F&G, Corporate and Other segments and offers title insurance, escrow, and other title-related services. In addition, it provides annuity and life insurance products.

The firm’s enterprise value currently stands at around $10.73 Billion, and its revenues for the previous financial year were approximately $15.6 Billion. The stock price has fluctuated between $56 and $41 over the past 52 weeks and currently stands at around $40.

COMPETITIVE ADVANTAGES

• BRAND: FNF consistently holds the top market share in residential purchase, refinance, and commercial markets. Market share at around 33% of a 19B market. FNF operates via a national and local multi-brand strategy. Different brands allow FNF to grow market share and profitability while preserving leadership.
• OFFERINGS: Omni-channel Model. The strong value proposition for customers to make the real estate closing process more efficient. It offers a single point of access to a broad platform of brands and title-related products necessary to close real estate transactions. The scale of the business allows for affordable offerings.
• SECTOR: Attractive and growing sector backed by strength in the U.S. residential and commercial real estate markets. Demographic trends provide a strong tailwind. The title insurance industry has increased from approximately $14.9 billion in 2016 to $20.7 billion in 2020.
• DEMAND: Most real estate transactions consummated in the U.S. require by law the use of title insurance by a lending institution. A rapidly ageing population creates a strong tailwind for annuity and life insurance services.
• MANAGEMENT: Strong balance sheet with over $900 million of capital returned to shareholders through ordinary dividends and share repurchases and $1.5 billion in cash & short-term investments at year-end 2021.

RISKS

• MACRO: The title industry is highly dependent on real estate markets, which, in turn, are highly sensitive to mortgage interest rates and the health of the overall economy. Typically, there is an inverse relationship between mortgage rate changes and real estate activity and, therefore, operating revenue for title insurers.
• PROPRIETARY RIGHTS: FNF has limited protection of proprietary rights, and there is no assurance that competitors will not independently develop or license products, services, or capabilities that are substantially equivalent or superior to FNF in the future.
• SECTOR RISKS: Pricing power directly connects to valuations in the real estate market. Revenues from title insurance policies correlate directly with the property’s value underlying the title policy, and appreciation or depreciation in the overall value of the real estate market are significant factors in total industry revenues.

OPPORTUNITY COST

Whenever considering an investment, one must compare it to any alternatives to weigh up the opportunity cost. At present, 10-year treasuries are yielding 2.96%. If we consider inflation, the real return is likely to be closer to 1%. The S&P 500 Index is currently trading at a Shiller P/E of 31.5 (higher than the historical mean of 16.8). The implied future annual return for SPY is likely to be very low.

FNF appears to offer a much better return for investors at present.

Assuming an average weighted free cash flow growth of 4%, FNF could potentially offer an annual internal rate of return (IRR) of around 16%.

CONCLUSION

Increasing interest rates and an inflationary environment provide considerable headwinds for FNF; however, the company is currently trading at an attractive valuation. I’m adding the stock to my watchlist. I’ll be following FNF while paying close attention to the USA housing market.

Disclaimer: The author does not hold ownership in the company mentioned when writing this article. I do not provide personal investment advice, and I am not a qualified licensed investment advisor. I am an amateur, independent investor. All the information is for entertainment or educational purposes only and should not be construed as personal investment advice. While the information provided is believed to be accurate, it may include errors or inaccuracies.