Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Fidelity National Financial Inc (FNF): Should You Follow This Title Insurer Into Mortgage Processing?

Fidelity National Financial Inc (NYSE:FNF), the country’s largest title insurer, split up its empire last decade in a bid to simplify operations and increase shareholder value. The spinoff unit, payments technology provider Fidelity National Information Services (NYSE:FIS), subsequently completed its own spinoff in 2008, floating its mortgage processing and technology subsidiary Lender Processing Services, Inc. (NYSE:LPS), based on the same shareholder value rationale. However, with yields on its fixed income portfolio low and the housing market rebounding, Fidelity National Financial sees value in the processing business, offering to acquire Lender Processing Services for $2.9 billion in May 2013. So, should investors follow the title insurance giant into mortgage processing?

Lender Processing Services, Inc. (NYSE:LPS) is one of the big providers of technology, data, and processing services to the mortgage industry. It focuses its sales efforts on the largest mega-banks, including Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM), which can provide a huge installed base for the company’s mortgage technology platform and the potential for ancillary services. Lender Processing Services also has a large default services unit that has been pressured lately by foreclosure moratoriums and settlements with state attorneys general.

Fidelity National Financial Inc (NYSE:FNF)In its latest fiscal year, Lender Processing Services, Inc. (NYSE:LPS) had a weak financial performance, especially in light of the strength in the domestic housing market. For the period, it reported increases in revenues and adjusted operating income of 0.8% and 5.3%, respectively, versus the prior year. While revenue in its origination area was up 20%, the gains were offset by double-digit revenue declines in its default services business. In addition, the company incurred higher technology costs as it continues to try to transition its large customer base to its new cloud computing product offerings.

Fidelity National Financial Inc (NYSE:FNF)’s core title business has rebounded sharply lately, in line with higher housing purchase and refinancing activity, approaching its segment sales peak in 2009. In its latest fiscal year, the title segment reported increases in revenues and operating income of 18.2% and 47.7%, respectively, compared to the prior year. The unit’s operating margin spiked due to both higher production volumes and a greater percentage of business from its internal sales force versus independent agents.

As a title insurer, though, Fidelity National Financial Inc (NYSE:FNF) needs to earn a decent return on its large investment balances to offset potential claim losses on its policies, a difficult task in the current rate environment. Consequently, the company has been taking a page from Warren Buffett’s playbook by buying controlling stakes in operating businesses, like auto parts maker Remy International and restaurateur J. Alexander. The title insurer’s management obviously sees the acquisition of Lender Processing Services, Inc. (NYSE:LPS) as a solid investment value, with the potential to cross-sell technology processing and title insurance products.

While an investor could buy Fidelity National Financial Inc (NYSE:FNF) to gain exposure to Lender Processing Services, Inc. (NYSE:LPS)’ future profit stream, only about 22% of the combined company’s revenue base will come from the mortgage processing segment. A better approach would be to buy competitor Ellie Mae Inc (NYSE:ELLI), a mortgage technology and processing company that has a leg up on Lender Processing Services in the cloud computing area with over 41,000 current active users. The company’s technology product offers compelling automation capabilities to mortgage professionals, leading to greater assurance that government regulations are being adhered to.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.