KBW Upgrades Fidelity, First American

The analysts at Keefe, Bruyette & Woods have upgraded the two largest title companies, Fidelity National Financial and First American Corp., to outperform from market perform and are changing its approach to valuing title companies based on longer-term earnings.

The report said KBW is making this change based on the feeling the market will start to look to longer-term results of these companies.

KBW said, “We expect earnings to trough in 2014 and grow strongly starting in 2015 driven by the ongoing recovery in the home purchase market. We also expect the valuation for the title insurers to trend towards the high end of the historical trading range since earnings driven by a strong purchase market should be far less volatile than current earnings, which are heavily refinance driven.”

The report also notes that while mortgage industry economists predict declining loan volume, that alone does not tell the whole story because the National Association of Realtors estimates that 30% of home sales are cash transactions. Even those transactions require title insurance.

KBW predicts that title order volume will decline by between 3% and 4% less than loan origination volume in 2014. It also believes commercial sales activity will not decline in 2014, also good news for title insurers.