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Tuesday, March 16, 2010

A Wide Moat Gem - Fidelity National Finance

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A Wide Moat Gem - Fidelity National Finance

Regardless of market conditions research continues. In times like these we are ever updating our list of interesting stocks and preparing when the proverbial “Fat Pitch” crosses our path. One stock of particular interest is Fidelity National Finance (FNF). Fidelity is at the pinnacle of companies in the title reinsurance field.

It is one of top 5 with approximately a 28% share of the US market. Title insurance is a very interesting type of insurance that is used in almost all real estate transactions. I mean every, not just including residential real estate, commercial estate but even including refinancing of mortgages. Title insurance is the proverbial “Gatekeeper” or “Toll Collector”. Fidelity National has fallen from its all time high of $28.62 to $14.61 as of Friday with a P/E of 13.65 and yield of 8.21%. Many top value investors have owned FNF in the past from David Einhorn of Greenlight, George Soros, Monish Pabrai and Richard Pzena.

Title insurance is not the sexy Apple or Google but a mundane cash producing cow. Title insurance guarantees the property owner as well as mortgage company against liens and encumbrances to the title that are not known at the time of closing. Most title defects are found before closing and resolved. However sometimes these liens or encumbrances can fall into a short period of time between title work and closing called a gap period. Most times if there is a claim, it can be adjusted by a correction of the title. Large claims are very rare and more further the risk is mitigated by reinsurance. On average throughout the years approximately only 8% of the all premiums have incurred losses for title insurance companies.

Fidelity further enhances its business by maintaining various pillars of profit. They maintain a flood insurance processing division, home warranty division, as well as a personal lines insurance company. In conjunction to this Fidelity has partial ownership in several other entities.

1. 40% of Sedgwick which is a third party administrator for workmen’s compensation claims. Fidelity owns approx

2. 70% of a timber company called Cascade.

3. 60% of FNRES an Internet real estate portal

There are numerous ways to come to come to a valuation. A tool we use is comparing the earnings per share ($1.12) to the current rate of return for US government bonds (4.52%). According to many analysts this gives the intrinsic value. This showed the stock almost 50% undervalued. However this is not close to exact and shows what the company is relative to the return of govt bonds. This is another confirming idea, but Warren Buffet uses the formula of discounting future earning discounted to present value. This too has limitations but we confident that FNF is extremely undervalued. Even though Fidelity is undervalued… the market is going through at a minimum a correction and prudence is warranted.

(ArticlesBase SC #272110)

Andrew Abraham

Labels: fidelity national, finance, national finance

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(ArticlesBase SC #1679464)