First American Financial Corp (FAF), Fidelity National Financial Inc (FNF): The Bottom Line

Like many financial firms, First American Financial Corp (NYSE:FAF) sells at a huge discount to the broad market, at nine times last year’s earnings and eight times forward earnings projections. The company generates virtually all of its earnings in the form of cash. The company doubled its dividend in 2012, and will continue to consider new dividend increases in the future. Meanwhile, the company shops for bolt-on acquisitions to consolidate even more of the title insurance business under its umbrella.

Another large player in title insurance is Fidelity National Financial Inc (NYSE:FNF). The company started as a pure play, but has since diversified into unrelated businesses, using leveraged buyouts to acquire positions in restaurant and car parts companies.

Fidelity National Financial Inc (NYSE:FNF) owns a 55% stake in American Blue Ribbon Holdings, which is best known for owning and operating national restaurant chains O’Charley’s, Max & Erma’s, and Village Inn concepts. It also owns an 87% interest in the parent company for J. Alexander’s and Stoney River Legendary Steaks, as well as a 51% position in Remy International, a designer, manufacturer, and distributor of car parts.

Fidelity National Financial Inc (NYSE:FNF)’s performance is heavily tied to the health of the economy. While it is a diversified business involved in several product lines (granted, insurance remains the biggest profit-driver), all of its businesses are highly cyclical. Investors who want to play American housing would be better suited with First American Financial, since Fidelity National Financial Inc (NYSE:FNF)’s capital allocation is suspect; it would appear that the company plans to invest substantially all title insurance profits in unrelated businesses. Sadly, in the first quarter of 2013, Fidelity National Financial Inc (NYSE:FNF)’s car parts and restaurant businesses generated pre-tax losses.

The bottom line

There is no better moat than selling a product people must purchase if they want to buy, sell, or refinance real estate. The market for title insurance will be around in 2050 just as it exists in 2013. The predictability and sustainability of this business model makes this firm an excellent play on housing.

First American Financial Corp (NYSE:FAF) is the best, biggest, and only pure-play in the space with the goal of growing market share within the rapidly consolidating industry of title insurance.

The article Earn a “Royalty” on Exploding Home Sales originally appeared on Fool.com and is written by Jordan Wathen.

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