Parker Kennedy wants investors to view First American Corp. as more than a title insurer. It’s been a tough sell.
His work to diversify Santa Ana-based First American, likely Orange County’s oldest company, has been overshadowed by the housing boom.
Despite buying a non-title company a month in recent years, title insurance still accounts for 70% of First American’s sales,the same as in 2000 when the housing market began to take off.
Of course, Kennedy, First American’s chairman and chief executive, isn’t complaining about revenue. First American is on track to hit $7.4 billion in sales this year, up 10% from last year, according to Thomson Financial.
Revenue Dip Seen
But he’s looking at next year, when analysts forecast First American’s revenue and profit will dip as housing markets cool. The company’s stock price,$42 at recent check with a market value of nearly $4 billion,reflects the prospect of a housing downturn.
That’s frustrating for Kennedy, who thinks Wall Street should give the company’s shares a premium for First American’s other real estate data services.
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Company HQ: 500,000 square feet |
Title insurance is a mature business in which existing companies are well established, Kennedy said. Unless the housing market is on an upswing, expansion requires stealing customers from competitors, he said.
“We are all beating each other up all day long,” Kennedy said.
Title insurance rises and falls with the housing market. First American is less of a cyclical company today than a decade ago, Kennedy said. But it’s still at risk if mortgage rates spike and home buying and refinancing plunge.
Kennedy’s goal is to have title insurance account for 50% of sales. It could take five years to get there, he said.
First American, founded in 1889 as Orange County Title, stepped up its diversification into financial data businesses in the late 1990s.
The company hoards data at its neoclassically designed campus in Santa Ana and sells access to lenders, real estate agents and appraisers.
Construction is wrapping up on the final buildings of the 500,000-square-foot campus, Kennedy said.
The company scans documents, inputs digital and aerial photos and collects other data on buildings in 2,000 of the nation’s 3,000 counties, according to Evan Jafa, chief technology officer.
First American tracks information on 80% to 90% of properties trading hands nationwide, Jafa said.
“They have the largest real estate database in the country,” said Geoffrey Dunn, an analyst who tracks the company for Keefe, Bruyette & Woods in New York.
Data and services related to real estate make up the fastest-growing and most profitable portion of First American’s businesses, Dunn said.
And the data hoard goes beyond real estate. First American provides credit histories in partnership with Costa Mesa-based Experian Group.
“What we really are is a data company,” Kennedy said. “We sell more data at First American than any other company in the U.S. of any kind.”
It took some 60 acquisitions to create the company’s centralized computer systems and databases, Kennedy said.
Yet after years of diversification, First American still is seen mainly as a title insurer.
The company’s shares trade at 10 times the company’s expected 2006 earnings per share. Competitor Fidelity National Financial Inc. in Jacksonville, Fla., is trading at an identical earnings multiple.
Equifax Inc., which gathers and sells financial and credit data, is more richly valued at a multiple of 17 times earnings.
But Kennedy may have hit on a way to get more respect from Wall Street.
He’s consolidated information not related to real estate transactions into St. Petersburg, Fla.-based First Advantage Corp. Last month First American sold its credit information group to First Advantage for $600 million in stock, upping its stake in First Advantage from 67% to 80%.
First Advantage took over First American’s mortgage, automotive, consumer and subprime credit businesses in the pact.
The structure is designed to get investors to separately value the two businesses: real estate information and services on the one hand and financial services and information on the other.
At about $27 last week, First Advantage’s stock trades at 21 times its expected earnings per share in 2006. The company counts a market value of $650 million.
First Advantage is becoming a growth engine in its own right. Last year it acquired about 15 companies.
The company was formed a couple of years ago when First American combined one of its units with US Search.com Inc. and spun off the combined company.
First Advantage provides employment screening, property management software, motor vehicle records and other services.
The strategy of flushing out non-title businesses also is being adopted by Fidelity National Financial, the largest title insurer in the nation. Fidelity has a big title operation in Irvine.
Regulators earlier this month approved Fidelity’s acquisition of St. Petersburg, Fla.-based Certegy Inc., which processes credit and debit card transactions, among other services.
Fidelity plans to combine its mortgage-processing unit with Certegy.
State Settlements
First American and some other title insurers faced a wave of bad publicity this year from a revenue-sharing relationship with homebuilders and realtors. Officials in some states have said the profit sharing was illegal and hurt consumers who had to pay more for title insurance.
Three title insurers, including First American, agreed in July to pay $37.8 million to settle charges brought by California Insurance Commissioner John Garamendi.
Garamendi said the title insurers cost homebuyers about $25 million because of the kickbacks. Buyers were reimbursed as part of the settlement, with First American paying $15 million in refunds and $5 million in penalties.
The company wanted to clear up the dispute quickly and reimburse homeowners to take the spotlight off its homebuilder clients, Kennedy said.
Looking ahead, Kennedy said the company is prepared if the housing market dips as mortgage rates rise. The title business stands to take a hit, he said.
“It’s a fairly people intensive business,” Kennedy said. “When the market drops we have to adjust expenses and it is disruptive.”
The company must do well for Kennedy to keep his job, he said. His family, which built up the operation, controls about 3.75% of the stock.
In 2003, Kennedy succeeded his father Donald Kennedy as chairman.
“I could be fired tomorrow,” Kennedy said. “I think that’s a very good thing.”
