Checking In on Fidelity National Financial (FNF)

FNF is something I have held for years and written about a few times. I’m doing a quick update here.

The reasons I’m holding remain the same: 1) intermediate term defensiveness, 2) long term upside, and 3) Stewart acquisition synergies. For the next year or so it’s a value/dividend play: number one player in oligopoly; strong cash flow generation at solid valuation; great balance sheet; 3%+ dividend yield. In the longer term FNF has upside from demographic tailwind (millennial reaching prime home buying age). FNF is also in the process of acquiring the industry’s number three player, Stewart, and will benefit from acquisition synergies.

Quarterly earnings will fluctuate and are not my focus. The main things I look for in earning calls are: 1) Stewart acquisition progress, 2) financial health, and 3) any disruptive threats in the horizon. Here are the latest.

1) STC acquisition. Not much update on this front. The deal is still stuck on NY regulators and it may come down to divestitures.

2) Financials. Balance sheet remains very strong. FNF debt outstanding was $837mm (compared to investment portfolio of more than 4.6bn). Debt to total capital ratio was 14%.

3) Disruptive Threats. One of the biggest trends in real estate is the emergence of iBuyers. The risks for FNF are 1) they have relationships with real estate agents who recommend FNF’s services, but iBuyers seek to place themselves at the center of transaction, resulting in channel disruption for FNF. 2) Also iBuyers will have better bargaining leverage compared to regular home owners since they hold large portfolios.

This exchange from 1Q19 transcript shows that FNF may have not grasped the full significance of iBuyer. It’s hard to tell, maybe management is simply being careful about what they say to maintain relationship with real estate agents. That said, it’s still early innings in the iBuyer game and a group with strong tech track record like FNF will likely get on top of it.

Mike Nolan
“…I think what we see at least today is that the real estate agent is still at the center of the transaction. And so while there's disruption potentially in brokerage, I don't know that that's disrupted the agent yet. Now that could change of course. But we're really focused on real estate agents, because that's who gives us the transactions and that's why we've made investments in real estate technology and lead gen and things like that because that's where we're going to continue to focus.

Jason Deleeuw
Got it. And what about the iBuyers and – I mean, how are you relating to them? It seems like it's going to continue to be a growing segment of the market. Is there a change in how you're doing that? Or you're reaching out to them or you're already working with some of them? How is that working?

Mike Nolan
Really both. We're reaching out and working with some of them. They're a customer just like anyone else.

They have transactional volume that they can control. And we'd like to perform that title and closing works. So, we're calling on them. We're working with them. In some cases they might be working with our agents. So by extension we're working with them. But they're really just another type of customer from our perspective.

Overall, title insurance is a sleep industry and the latest quarter was business as usual. I continue to hold a 4%-5% position, and would hold even in the unlikely scenario that Stewart acquisition does not come through.