First American Financial has been treading water for the past six months, recording a small return of 1.4% while holding steady at $64.82. The stock also fell short of the S&P 500’s 6.4% gain during that period.
Is now the time to buy First American Financial, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is First American Financial Not Exciting?
We’re sitting this one out for now. Here are three reasons we avoid FAF, plus one stock we’d rather own.
1. Net Premiums Earned Hit a Plateau
When insurers sell policies, they protect themselves from extremely large losses or an outsized accumulation of losses with reinsurance (insurance for insurance companies). Net premiums earned are therefore gross premiums less what’s ceded to reinsurers as a risk mitigation and transfer strategy.
First American Financial’s net premiums earned was flat over the last five years, much worse than the broader insurance industry and in line with its total revenue.
2. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
First American Financial’s weak 1.4% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.
3. Substandard BVPS Growth Indicates Limited Asset Expansion
Book value per share (BVPS) serves as a key indicator of an insurer’s financial stability, reflecting a company’s ability to maintain adequate capital levels and meet its long-term obligations to policyholders.
To the detriment of investors, First American Financial’s BVPS grew at a tepid 7.9% annual clip over the last two years.
Final Judgment
First American Financial isn’t a terrible business, but it doesn’t pass our bar. With its shares trailing the market in recent months, the stock trades at 1.1× forward P/B (or $64.82 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are superior stocks to buy right now. We’d recommend looking at the Amazon and PayPal of Latin America.
Stocks We Like More Than First American Financial
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