First American Corp (FAF)

There is going to be near term pressure on the stock price caused by the overall slowdown in the housing market. I don’t see any positive catalysts in the short term. So why Buy? The long term story is what FAF has going for them. Here is why I am buying:





Management has the discipline necessary to cut expenses. FAF has moved many of its processes off shore in order to increase its margins. In response to the continuing housing slump, FAF has announced that they are laying off 1,300 employees in the 3rd quarter, and are eliminating many of the executive perks. This is in addition to the 600 they laid off in the 2nd quarter.





FAF has invested in technology that automates a lot of their processes which provides a better product at a cheaper price. Because the number of real estate transaction has declined, the title insurance segment is becoming much more competitive. As the larger title insurance companies improve their efficiencies, the insurance rates will go down. As rates drop, the smaller title companies will not be able to compete, resulting in either the smaller companies going out of business, or partnering with the larger companies. Either way, FAF will increase its already impressive market share.





FAF is expanding internationally. Imagine how many title insurance and escrow transactions will happen in China alone! As an added bonus, a weak dollar helps the bottom line.





While the lion share of FAF’s revenue comes from title insurance, FAF has increased its non-title-insurance related businesses. These other segments are going to continue to grow as a percentage of the bottom line making FAF’s stock price less correlated to real estate cycles. A more stable stock price is attractive to many institutional investors.





When the larger title companies file new rates, don’t be surprised by a significant short term drop in the stock price of all of the title insurers. This will be a buying opportunity. The lower rates will scare less knowledgeable investors, so watch for it, and buy on the dips.