Wall Street Eyeing First American’s Next Move

Santa Ana-based First American Corp.’s push to expand beyond its mainstay title business has paid off on Wall Street with the company’s stock at a nine-year high.

Now investors are waiting to see if First American will shift course by making a play for one of its top title competitors.

LandAmerica financial Group Inc., the country’s No. 3 title insurer, might soon find itself an acquisition target. The Richmond, Va.-based company has been urged by its third-biggest shareholder to put itself up for sale.

“At this time the company should consider other options,” hedge fund investor Viking Global Investors LP said in a June 1 letter to LandAmerica’s board.

The hedge fund said it believes an acquisition of LandAmerica by one of its larger rivals would result in the company nearly doubling earnings.

Greenwich, Conn.-based Viking Global has about an 8% stake in LandAmerica. Officials for LandAmerica,which bought Irvine’s Southland Title Corp. in 2004,haven’t commented on Viking’s proposal.

The number of LandAmerica’s larger title insurer competitors, which write policies protecting buyers of homes and other real estate from claims contesting ownership, is a short list.

LandAmerica, which counts a recent market value of about $1.8 billion, has about a 20% share of the national title insurance business.

First American and Jacksonville, Fla.-based Fidelity National financial Inc. each have about 30%.

If First American’s interested in a deal, it’s playing coy.

The company has said in the past year that it isn’t particularly interested in buying a large title company, and that’s still the case, Chief financial Officer Frank McMahon said at an investor presentation in New York last week.

Preferred acquisition targets include “data analytics, potential lead generation (business), and maybe some small, infrequent title company,” he said. “We think our money is better spent on our data business, or returning it to shareholders.”

“We will continue to make acquisitions. We will continue to grow,” Chief Executive Parker Kennedy said at the conference. “But we will do fewer acquisitions. We will do larger acquisitions, and we will do strategic acquisitions.”

First American and Fidelity have been jostling for the No. 1 position in the title insurance sector for the past few years. Fidelity long had been the clear leader, but its long-term focus on strengthening profits at the expense of growth has helped First American close the gap, with a 10% increase in market share during the past decade.

Title Changes

First American also has begun revamping its title business strategy to emphasize profits,a strategy that has been well-received by Wall Street as of late.

“We don’t have the best (title) margins (in the industry), and we want to,” Kennedy said.

Last week, Lehman Brothers downgraded First American on profit concerns.

The company’s title insurance division posted a 2% decline in first quarter revenue to $1.4 billion,about 67% of the company’s total sales, but only 32% of pre-tax income.

Still, shares are up more than 30% so far this year. The surge has pushed up the company’s market value to roughly $5.3 billion at recent check.

Its stock has increased some 50% from last summer, despite a sluggish real estate market that has hammered national homebuilders, lenders and other related businesses.

First American’s stock rose nearly 5% in May alone, prior to the LandAmerica news. It rose an additional 3% after the news. LandAmerica’s stock jumped more than 10%.

Behind the Rise

A few factors are behind the increase, which have come as the company’s core title business is slowing.

What’s more, profit-sapping title claims that the company has had to pay have increased by more than a third in the past year to $62.4 million in the first quarter, First American said.

McMahon, who joined the company last year, has been pushing First American’s recent emphasis on creating value awareness, which has struck a chord with Wall Street. Besides better title margins, goals include educating the market about the value of its data businesses.

First American’s information services divisions made up 29% of its revenue in the first quarter, but 60% of pre-tax income.

The diversification strategy appears to have analysts pleased.

“First American is leveraging its ample technology and information base into a variety of businesses and services that the consumer and companies want and will pay for,” said Morningstar’s Jim Ryan in a recent research report.

Of the top three title companies, “We’d put our money on First American,” Ryan said.