First American Financial Highlights New Risk Factors Amid Acquisitions


First American Financial (FAF) serves the real estate and mortgage industries, providing title insurance and settlement services. The company continues to expand through acquisitions while rebalancing its portfolio by exiting some businesses. (See Top Smart Score Stocks on TipRanks)

Let’s take a look at the company’s latest financial performance, corporate updates, and newly added risk factors.

Q3 Financial Results

First American Financial reported revenue of $2.56 billion for Q3 2021. That increased from $1.91 billion in the same quarter last year and surpassed the consensus estimate of $2.04 billion. It posted adjusted EPS of $2.15, compared to $1.32 in the same quarter last year, and beat the consensus estimate of $1.86. (See First American Financial stock charts on TipRanks).

First American Financial returned $14.1 million to shareholders through share repurchases in Q3. It ended the quarter with $1.95 billion in cash after raising $650 million through senior notes maturing in 2031.

Corporate Updates

The company is winding down its property and casualty business, which recorded a pretax loss of $10.5 million in Q3. It expects to complete the wind-down in Q3 2022.

First American Financial has completed the acquisition of ServiceMac, a mortgage sub-servicing company. ServiceMac offers lenders and investors customized solutions to increase customer retention and profitability. The company said it will offer ServiceMac important data that it can leverage to develop new products.

First American Financial has acquired Georgetown Title, which serves the Texas real-estate market with title insurance and settlement services. Georgetown has built a reputable brand in the Texas real-estate community, and First American Financial counts on the acquisition to strengthen its business in Williamson County.

The company has invested an additional $150 million in its Endpoint unit, bringing total capital raised by the business to $220 million. Endpoint offers digital title and settlement services. It serves real-estate agents, protech companies, and brokerage firms. Endpoint launched in 2018 and has facilitated more than $2.5 billion in real-estate closing transactions.

Risk Factors

First American Financial carries 26 risk factors, according to the new TipRanks Risk Factors tool. Since Q4 2020, the company has updated its risk profile with 13 new risk factors.

The company cautions that unfavorable economic conditions could reduce its earnings, cause difficulties in servicing debts, and make accessing additional capital challenging. As a result, the value of the company’s investments could decline, and the dividend program may be adversely affected.

First American Financial tells investors that insurance rates are heavily regulated across the states. In many states, for example, rate changes require insurance regulators’ approval before they can take effect. Therefore, the company warns that regulation could hinder it from quickly adapting to market changes with price adjustments, which could, in turn, have an unfavorable effect on its business.

First American Financial has acquired a number of companies and expects to make more acquisitions in the future. But it cautions that it may not fully achieve the anticipated benefits of the acquisitions because of difficulties integrating the acquired businesses and unexpected expenses. Furthermore, an acquisition like ServiceMac may subject the company to additional regulatory burdens.

The majority of First American Financial’s risk factors fall under the Finance and Corporate category, with 46% of the total risks. That is below the sector average of 67%. First American Financial’s stock price has gained about 40% since the beginning of 2021.

Analysts’ Take

Barclays analyst Mark Devries recently reiterated a Buy rating on First American Financial stock and raised the price target to $87 from $82. Devries’ new price target suggests 20.35% upside potential.

Consensus among analysts is a Moderate Buy based on 2 Buys. The average First American Financial price target of $85.50 implies 18.27% upside potential to current levels.

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