Intrinsic value of First American Financial - FAF

Previous Close

$61.16

  Intrinsic Value

$62.25

stock screener

  Rating & Target

hold

+2%

Previous close

$61.16

 
Intrinsic value

$62.25

 
Up/down potential

+2%

 
Rating

hold

Our model is not good at valuating stocks of financial companies, such as FAF.

We calculate the intrinsic value of FAF stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Shares outstanding, mln

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  7.75
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  0
  5,688
  5,818
  5,968
  6,136
  6,322
  6,526
  6,748
  6,989
  7,248
  7,526
  7,824
  8,141
  8,479
  8,839
  9,220
  9,624
  10,051
  10,504
  10,982
  11,486
  12,019
  12,580
  13,172
  13,796
  14,452
  15,144
  15,872
  16,638
  17,443
  18,291
Variable operating expenses, $m
 
  4,992
  5,104
  5,233
  5,377
  5,537
  5,712
  5,903
  6,110
  6,333
  6,572
  6,726
  6,999
  7,290
  7,599
  7,927
  8,274
  8,642
  9,031
  9,442
  9,875
  10,333
  10,816
  11,325
  11,861
  12,426
  13,020
  13,646
  14,304
  14,997
  15,726
Fixed operating expenses, $m
 
  179
  184
  188
  193
  198
  203
  208
  213
  219
  224
  230
  235
  241
  247
  253
  260
  266
  273
  280
  287
  294
  301
  309
  317
  324
  333
  341
  349
  358
  367
Total operating expenses, $m
  5,066
  5,171
  5,288
  5,421
  5,570
  5,735
  5,915
  6,111
  6,323
  6,552
  6,796
  6,956
  7,234
  7,531
  7,846
  8,180
  8,534
  8,908
  9,304
  9,722
  10,162
  10,627
  11,117
  11,634
  12,178
  12,750
  13,353
  13,987
  14,653
  15,355
  16,093
Operating income, $m
  510
  517
  530
  547
  566
  587
  611
  637
  665
  696
  730
  868
  906
  948
  992
  1,040
  1,090
  1,143
  1,200
  1,260
  1,324
  1,392
  1,463
  1,538
  1,618
  1,702
  1,791
  1,885
  1,984
  2,088
  2,198
EBITDA, $m
  609
  651
  666
  683
  703
  725
  750
  778
  808
  840
  875
  913
  954
  997
  1,044
  1,093
  1,146
  1,202
  1,261
  1,324
  1,391
  1,462
  1,536
  1,615
  1,699
  1,787
  1,880
  1,978
  2,081
  2,190
  2,305
Interest expense (income), $m
  30
  34
  39
  46
  53
  61
  70
  80
  90
  102
  114
  128
  142
  157
  173
  191
  209
  228
  249
  271
  294
  318
  343
  370
  399
  429
  460
  494
  528
  565
  604
Earnings before tax, $m
  478
  483
  491
  501
  513
  526
  541
  557
  575
  594
  616
  740
  764
  791
  819
  849
  881
  915
  951
  990
  1,030
  1,074
  1,120
  1,168
  1,219
  1,274
  1,331
  1,391
  1,455
  1,523
  1,594
Tax expense, $m
  135
  130
  133
  135
  138
  142
  146
  150
  155
  160
  166
  200
  206
  214
  221
  229
  238
  247
  257
  267
  278
  290
  302
  315
  329
  344
  359
  376
  393
  411
  430
Net income, $m
  343
  352
  359
  366
  374
  384
  395
  407
  420
  434
  449
  540
  558
  577
  598
  620
  643
  668
  694
  722
  752
  784
  817
  853
  890
  930
  972
  1,016
  1,062
  1,112
  1,164

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  8,832
  9,014
  9,221
  9,458
  9,724
  10,019
  10,342
  10,694
  11,076
  11,486
  11,927
  12,399
  12,902
  13,438
  14,007
  14,611
  15,252
  15,929
  16,646
  17,404
  18,203
  19,047
  19,937
  20,875
  21,863
  22,904
  24,000
  25,153
  26,367
  27,644
  28,987
Adjusted assets (=assets-cash), $m
  8,832
  9,014
  9,221
  9,458
  9,724
  10,019
  10,342
  10,694
  11,076
  11,486
  11,927
  12,399
  12,902
  13,438
  14,007
  14,611
  15,252
  15,929
  16,646
  17,404
  18,203
  19,047
  19,937
  20,875
  21,863
  22,904
  24,000
  25,153
  26,367
  27,644
  28,987
Revenue / Adjusted assets
  0.000
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
  0.631
Average production assets, $m
  486
  495
  506
  519
  534
  550
  568
  587
  608
  631
  655
  681
  708
  738
  769
  802
  837
  874
  914
  955
  999
  1,046
  1,094
  1,146
  1,200
  1,257
  1,318
  1,381
  1,447
  1,518
  1,591
Working capital, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total debt, $m
  737
  853
  990
  1,146
  1,321
  1,515
  1,728
  1,961
  2,212
  2,482
  2,773
  3,084
  3,415
  3,768
  4,144
  4,542
  4,964
  5,411
  5,883
  6,382
  6,909
  7,465
  8,051
  8,669
  9,321
  10,007
  10,729
  11,489
  12,289
  13,130
  14,015
Total liabilities, $m
  5,824
  5,940
  6,077
  6,233
  6,408
  6,602
  6,815
  7,048
  7,299
  7,569
  7,860
  8,171
  8,502
  8,855
  9,231
  9,629
  10,051
  10,498
  10,970
  11,469
  11,996
  12,552
  13,138
  13,756
  14,408
  15,094
  15,816
  16,576
  17,376
  18,217
  19,102
Total equity, $m
  3,008
  3,074
  3,144
  3,225
  3,316
  3,416
  3,527
  3,647
  3,777
  3,917
  4,067
  4,228
  4,400
  4,582
  4,776
  4,982
  5,201
  5,432
  5,676
  5,935
  6,207
  6,495
  6,798
  7,118
  7,455
  7,810
  8,184
  8,577
  8,991
  9,427
  9,885
Total liabilities and equity, $m
  8,832
  9,014
  9,221
  9,458
  9,724
  10,018
  10,342
  10,695
  11,076
  11,486
  11,927
  12,399
  12,902
  13,437
  14,007
  14,611
  15,252
  15,930
  16,646
  17,404
  18,203
  19,047
  19,936
  20,874
  21,863
  22,904
  24,000
  25,153
  26,367
  27,644
  28,987
Debt-to-equity ratio
  0.245
  0.280
  0.310
  0.360
  0.400
  0.440
  0.490
  0.540
  0.590
  0.630
  0.680
  0.730
  0.780
  0.820
  0.870
  0.910
  0.950
  1.000
  1.040
  1.080
  1.110
  1.150
  1.180
  1.220
  1.250
  1.280
  1.310
  1.340
  1.370
  1.390
  1.420
Adjusted equity ratio
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  343
  352
  359
  366
  374
  384
  395
  407
  420
  434
  449
  540
  558
  577
  598
  620
  643
  668
  694
  722
  752
  784
  817
  853
  890
  930
  972
  1,016
  1,062
  1,112
  1,164
Depreciation, amort., depletion, $m
  99
  135
  136
  137
  138
  139
  140
  141
  143
  144
  146
  46
  48
  50
  52
  54
  56
  59
  61
  64
  67
  70
  73
  77
  81
  84
  88
  93
  97
  102
  107
Funds from operations, $m
  449
  487
  494
  502
  512
  523
  535
  548
  562
  578
  595
  586
  606
  627
  649
  674
  699
  727
  756
  787
  819
  854
  891
  930
  971
  1,014
  1,060
  1,108
  1,160
  1,214
  1,270
Change in working capital, $m
  -40
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from operations, $m
  489
  487
  494
  502
  512
  523
  535
  548
  562
  578
  595
  586
  606
  627
  649
  674
  699
  727
  756
  787
  819
  854
  891
  930
  971
  1,014
  1,060
  1,108
  1,160
  1,214
  1,270
Maintenance CAPEX, $m
  0
  -33
  -33
  -34
  -35
  -36
  -37
  -38
  -39
  -41
  -42
  -44
  -46
  -48
  -50
  -52
  -54
  -56
  -59
  -61
  -64
  -67
  -70
  -73
  -77
  -81
  -84
  -88
  -93
  -97
  -102
New CAPEX, $m
  -132
  -9
  -11
  -13
  -15
  -16
  -18
  -19
  -21
  -23
  -24
  -26
  -28
  -29
  -31
  -33
  -35
  -37
  -39
  -42
  -44
  -46
  -49
  -51
  -54
  -57
  -60
  -63
  -67
  -70
  -74
Cash from investing activities, $m
  -610
  -42
  -44
  -47
  -50
  -52
  -55
  -57
  -60
  -64
  -66
  -70
  -74
  -77
  -81
  -85
  -89
  -93
  -98
  -103
  -108
  -113
  -119
  -124
  -131
  -138
  -144
  -151
  -160
  -167
  -176
Free cash flow, $m
  -121
  445
  450
  455
  462
  471
  480
  490
  502
  515
  528
  516
  532
  550
  569
  589
  610
  633
  658
  684
  711
  741
  772
  805
  840
  876
  915
  957
  1,000
  1,046
  1,095
Issuance/(repayment) of debt, $m
  155
  116
  137
  156
  175
  194
  213
  232
  251
  271
  290
  311
  332
  353
  375
  398
  422
  447
  472
  499
  527
  556
  586
  618
  651
  686
  722
  760
  800
  842
  885
Issuance/(repurchase) of shares, $m
  3
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  239
  116
  137
  156
  175
  194
  213
  232
  251
  271
  290
  311
  332
  353
  375
  398
  422
  447
  472
  499
  527
  556
  586
  618
  651
  686
  722
  760
  800
  842
  885
Total cash flow (excl. dividends), $m
  111
  561
  586
  612
  638
  665
  693
  722
  753
  785
  819
  827
  864
  903
  944
  987
  1,032
  1,080
  1,130
  1,183
  1,238
  1,297
  1,358
  1,423
  1,491
  1,562
  1,638
  1,717
  1,800
  1,888
  1,980
Retained Cash Flow (-), $m
  -258
  -66
  -71
  -81
  -91
  -101
  -110
  -120
  -130
  -140
  -150
  -161
  -172
  -183
  -194
  -206
  -218
  -231
  -244
  -258
  -273
  -288
  -303
  -320
  -337
  -355
  -374
  -393
  -414
  -435
  -458
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  496
  516
  531
  547
  564
  583
  602
  623
  645
  669
  666
  692
  720
  750
  781
  814
  849
  886
  925
  966
  1,009
  1,055
  1,103
  1,154
  1,207
  1,264
  1,323
  1,386
  1,452
  1,522
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  475
  472
  462
  450
  437
  423
  407
  389
  371
  351
  316
  295
  274
  252
  229
  207
  185
  163
  142
  123
  104
  88
  72
  59
  47
  37
  28
  21
  16
  11
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

First American Financial Corporation, through its subsidiaries, is engaged in the business of providing financial services. The Company operates through the title insurance and services segment, and specialty insurance segment. The title insurance and services segment provides title insurance, closing and/or escrow services and similar or related services domestically and internationally in connection with residential and commercial real estate transactions. The title insurance and services segment also provides products, services and solutions involving the use of property related data, including data derived from its database, which are designed to manage risk or otherwise facilitate real estate transactions. The specialty insurance segment issues property and casualty insurance policies and sells home warranty products to residential homeowners and renters for liability losses and typical hazards, such as fire, theft, vandalism and other types of property damage.

FINANCIAL RATIOS  of  First American Financial (FAF)

Valuation Ratios
P/E Ratio 19.6
Price to Sales 1.2
Price to Book 2.2
Price to Tangible Book
Price to Cash Flow 13.8
Price to Free Cash Flow 18.8
Growth Rates
Sales Growth Rate 7.7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 6.5%
Cap. Spend. - 3 Yr. Gr. Rate 8.7%
Financial Strength
Quick Ratio NaN
Current Ratio NaN
LT Debt to Equity 24.5%
Total Debt to Equity 24.5%
Interest Coverage 17
Management Effectiveness
Return On Assets 4.3%
Ret/ On Assets - 3 Yr. Avg. 3.9%
Return On Total Capital 9.7%
Ret/ On T. Cap. - 3 Yr. Avg. 8.8%
Return On Equity 11.9%
Return On Equity - 3 Yr. Avg. 10.7%
Asset Turnover 0.7
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 10.9%
EBITDA Margin - 3 Yr. Avg. 10.4%
Operating Margin 9.1%
Oper. Margin - 3 Yr. Avg. 8.7%
Pre-Tax Margin 8.6%
Pre-Tax Margin - 3 Yr. Avg. 8.1%
Net Profit Margin 6.2%
Net Profit Margin - 3 Yr. Avg. 5.6%
Effective Tax Rate 28.2%
Eff/ Tax Rate - 3 Yr. Avg. 31.6%
Payout Ratio 38.5%

FAF stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the FAF stock intrinsic value calculation we used $5576 million for the last fiscal year's total revenue generated by First American Financial. The default revenue input number comes from 2016 income statement of First American Financial. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our FAF stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for FAF is calculated based on our internal credit rating of First American Financial, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of First American Financial.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of FAF stock the variable cost ratio is equal to 87.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $175 million in the base year in the intrinsic value calculation for FAF stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 4.6% for First American Financial.

Corporate tax rate of 27% is the nominal tax rate for First American Financial. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the FAF stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for FAF are equal to 8.7%.

Life of production assets of 14.9 years is the average useful life of capital assets used in First American Financial operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for FAF is equal to 0%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $3008 million for First American Financial - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 111.349 million for First American Financial is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of First American Financial at the current share price and the inputted number of shares is $6.8 billion.

RELATED COMPANIES Price Int.Val. Rating
STC Stewart Inform 46.17 17.61  str.sell
ITIC Investors Titl 196.00 234.73  hold
ORI Old Republic I 20.28 66.13  str.buy
RDN Radian Group 22.26 23.70  hold
AGII Argo Group Int 62.55 134.57  str.buy

COMPANY NEWS

▶ First American Financial posts 3Q profit   [07:09AM  Associated Press]
▶ New Strong Buy Stocks for September 20th   [Sep-20-17 09:51AM  Zacks]
▶ These 3 Stocks Just Raised Their Dividends   [Aug-24-17 06:16AM  Motley Fool]
▶ XL Group (XL) & Subsidiaries Rated by A.M. Best   [Aug-14-17 05:24PM  Zacks]
Financial statements of FAF
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

FREE DOWNLOAD
Follow us on:   twitter   twitter   twitter   twitter

ASSET ALLOCATION

About X-FIN       Site news       Privacy policy       Terms of use       FAQ

Copyright © X-FIN.com 2005-2018. All rigths reserved.