First Citizens BancShares Inc. (NASDAQ:FCNCA) was presented by Chris Mayer. Title insurers First American Financial Corp (NYSE:FAF) and Fidelity National Financial Inc (NYSE:FNF) were presented by Zeke Ashton. The common denominator was the thesis that investors are still wary of financials but shouldn’t be. And you have three size market caps to choose from.
A first-rate family business
Chris Mayer, of the Capital & Crisis Newsletter, presented on the advantages of owner-operator companies and likes First Citizens BancShares Inc. (NASDAQ:FCNCA) for its 33% family ownership. After Bank of Oklahoma it is the second biggest family-owned bank in the US.
The bank bought back $92 million worth of shares from a member of the Holding family in December and still has a larger share buyback program in place to retire 1% of shares outstanding. Since Robert Holding, a bank teller, rose to become President in the 1930s the company has been under the control of the low-profile Holdings and descendent Frank Holding Jr. is CEO. The company was founded in 1898.
The company has extended its reach from Raleigh, North Carolina by purchasing six failed banks in recent years with 414 branches extending to the Pacific Northwest although it remains concentrated in the Mid-Atlantic. It faces tough competition in this affluent area that could almost be said to have a surfeit of banks including the big dogs Bank of America, BB&T, and Wells Fargo. But it is a conservatively run bank and didn’t accept government aid during the financial crisis. It also loaned mainly to affluent customers who could qualify for its wealth management offerings.
Fist Citizen is still a small-cap for now at an $1.8 billion market cap but it trades under book value and at a 14.47 trailing P/E with a .60% yield. The stock is only up 10.6% over the last year and hasn’t been able to break over $200 with its 52 week high on May 6 at $192.60.
A first rate play on housing
Zeke Ashton of Centaur Capital Partners, while by no means a fan of homebuilders, likes title insurers as the way to play the housing resurgence, instead. And he likes First American Financial Corp (NYSE:FAF), a California title and specialty insurer which also offers banking, trust and advisory services.
This name is trading over book value but has risen 55.83% over the last year. It has a 1.90% yield at a 14% payout ratio. It is trading at a trailing 9.58 P/E.
The company reported Q1 earnings per share of $0.33 on April 25 and CEO Dennis Gilmore highlighted they closed 12% more resale orders and revenue per each resale order was up 11% with higher home sale prices. Combined this helped raise total revenues 19% to $1.15 billion beating analysts’ estimates of $1.08 billion. Gilmore was bullish on the spring selling season already underway with refinance volumes of 3,300 orders daily for an increase of 21% year over year.
Also in its favor the mid-cap company ($2.89 billion market cap) was named to the Forbes list of 100 Most Trustworthy Companies in America. The 120 year old company is a title services provider globally; it was the first title insurance provider in Mexico, Korea, and Hong Kong and has leading market share in the UK and Australia. In 2010 it spun off its analytics division to become CoreLogic.
It’s lightly covered with only four analysts and analysts see a 6% decline in growth. This seems to contradict CEO Gilmore’s bullishness as he said on the call the housing recovery is still in its early stages and getting better all the time. That said, title insurers may be a better way to play housing than the builders.
A baby Berkshire Hathaway Inc. (NYSE:BRK.A)
Ashton also likes Fidelity National Financial Inc (NYSE:FNF). This company has virtually the same business model, title insurance and mortgage services as First American Financial Corp (NYSE:FAF) but with a significant twist. This company is also involved in original and after-market electrical components for vehicles. They also own and operate US restaurants: O’Charley’s, Ninety Nine Restaurants, Max & Erma’s, Village Inn, Bakers Square, and Stoney River Legendary Steaks. What?! A motley collection of businesses for a title insurer.
The restaurants division is part of their 55% stake in American Blue Ribbon Holdings which operates 650 restaurants in the US under the aforementioned brands. The Stoney River Legendary Steaks restaurants are part of their 87% stake in J. Alexanders LLC, a high end chain concept. The auto parts division is thanks to a 50.2% stake in Remy International which generates $1.2 billion in annual revenue. Fidelity National Financial Inc (NYSE:FNF) also has a 33% stake in Ceridian Corporation, a business services and payroll management company.
Hmmm…it seems like Fidelity National Financial Inc (NYSE:FNF) may be a baby Berkshire Hathaway Inc. (NYSE:BRK.A) in the making.
Fidelity National Financial Inc (NYSE:FNF) offers a larger yield of 2.60% at a 22% payout ratio and a trailing P/E of 9.63. This is a big cap, however, with a $5.89 billion market cap. It is the biggest US title insurer and brings in $5 billion in annual revenue from its title business alone. Fidelity National is not as global as First American Financial Corp (NYSE:FAF) as its non-domestic business only extends to Guam, Puerto Rico, Canada, and Mexico.
The company reported Q1 results on May 1 that were just as heartening as First American Financial Corp (NYSE:FAF)’s with a record pre-tax title margin gain of 16%, the best number since 2004 for an EPS of $0.39. Happy days in housing indeed!
Fidelity National Financial Inc (NYSE:FNF) is number 472 on the Fortune 500 list and it has a 5% insider hold. This is an intriguing company on its way to being a mini-conglomerate.
First and last…
Remember these financials are undercovered, underowned, and undiscovered until now. If you are interested now may be the time to jump in feet first before the investing community embraces them wholeheartedly. If you believe in the owner-operator thesis then consider First Citizens BancShares Inc. (NASDAQ:FCNCA). Finally, if you need a housing play then First American Financial Corp (NYSE:FAF) or Fidelity National Financial could be your go-to names. Fidelity National Financial Inc (NYSE:FNF) is very interesting and worth some extra due diligence.
The article 3 Financials for a First-Rate Portfolio originally appeared on Fool.com.
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