Intrinsic value of First American Financial - FAF

Previous Close

$54.48

  Intrinsic Value

$3.85

stock screener

  Rating & Target

str. sell

-93%

Previous close

$54.48

 
Intrinsic value

$3.85

 
Up/down potential

-93%

 
Rating

str. sell

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

Revenue (in 2017), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 6.1

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   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
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  3.50
  3.65
  3.78
  3.91
  4.02
  4.11
  4.20
  4.28
  4.35
  4.42
  4.48
  4.53
  4.58
  4.62
  4.66
  4.69
  4.72
  4.75
  4.77
  4.80
  4.82
  4.84
  4.85
  4.87
  4.88
  4.89
  4.90
  4.91
  4.92
  4.93
Revenue, $m
  5,974
  6,192
  6,426
  6,677
  6,946
  7,231
  7,535
  7,858
  8,200
  8,563
  8,946
  9,351
  9,779
  10,231
  10,707
  11,209
  11,739
  12,296
  12,883
  13,501
  14,152
  14,836
  15,556
  16,313
  17,109
  17,947
  18,826
  19,751
  20,723
  21,745
Variable operating expenses, $m
  5,422
  5,617
  5,826
  6,051
  6,291
  6,546
  6,818
  7,106
  7,412
  7,736
  8,000
  8,362
  8,745
  9,149
  9,575
  10,024
  10,497
  10,996
  11,521
  12,074
  12,656
  13,268
  13,911
  14,588
  15,300
  16,049
  16,836
  17,663
  18,532
  19,446
Fixed operating expenses, $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
Total operating expenses, $m
  5,422
  5,617
  5,826
  6,051
  6,291
  6,546
  6,818
  7,106
  7,412
  7,736
  8,000
  8,362
  8,745
  9,149
  9,575
  10,024
  10,497
  10,996
  11,521
  12,074
  12,656
  13,268
  13,911
  14,588
  15,300
  16,049
  16,836
  17,663
  18,532
  19,446
Operating income, $m
  552
  575
  600
  627
  655
  685
  717
  752
  788
  826
  946
  989
  1,034
  1,082
  1,132
  1,185
  1,241
  1,300
  1,362
  1,428
  1,496
  1,569
  1,645
  1,725
  1,809
  1,898
  1,991
  2,088
  2,191
  2,299
EBITDA, $m
  1,666
  1,727
  1,793
  1,863
  1,937
  2,017
  2,102
  2,192
  2,287
  2,388
  2,495
  2,608
  2,728
  2,854
  2,987
  3,127
  3,274
  3,430
  3,594
  3,766
  3,948
  4,138
  4,339
  4,550
  4,773
  5,006
  5,251
  5,509
  5,781
  6,066
Interest expense (income), $m
  30
  294
  279
  285
  291
  297
  304
  312
  319
  328
  337
  346
  356
  366
  377
  389
  401
  414
  428
  442
  458
  474
  490
  508
  527
  546
  567
  589
  611
  635
  660
Earnings before tax, $m
  258
  296
  316
  336
  358
  381
  406
  432
  460
  489
  600
  633
  668
  704
  743
  784
  827
  872
  920
  970
  1,023
  1,078
  1,137
  1,198
  1,263
  1,331
  1,402
  1,477
  1,556
  1,639
Tax expense, $m
  70
  80
  85
  91
  97
  103
  110
  117
  124
  132
  162
  171
  180
  190
  201
  212
  223
  235
  248
  262
  276
  291
  307
  324
  341
  359
  379
  399
  420
  443
Net income, $m
  189
  216
  230
  245
  261
  278
  296
  315
  336
  357
  438
  462
  487
  514
  542
  572
  604
  637
  671
  708
  747
  787
  830
  875
  922
  971
  1,024
  1,078
  1,136
  1,196

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
Total assets, $m
  3,178
  3,294
  3,418
  3,552
  3,694
  3,846
  4,008
  4,180
  4,362
  4,555
  4,758
  4,974
  5,202
  5,442
  5,695
  5,962
  6,244
  6,541
  6,853
  7,182
  7,528
  7,892
  8,275
  8,677
  9,101
  9,546
  10,014
  10,506
  11,023
  11,566
Adjusted assets (=assets-cash), $m
  3,178
  3,294
  3,418
  3,552
  3,694
  3,846
  4,008
  4,180
  4,362
  4,555
  4,758
  4,974
  5,202
  5,442
  5,695
  5,962
  6,244
  6,541
  6,853
  7,182
  7,528
  7,892
  8,275
  8,677
  9,101
  9,546
  10,014
  10,506
  11,023
  11,566
Revenue / Adjusted assets
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
  1.880
Average production assets, $m
  10,347
  10,725
  11,131
  11,565
  12,030
  12,525
  13,051
  13,610
  14,203
  14,830
  15,494
  16,196
  16,937
  17,720
  18,545
  19,415
  20,331
  21,297
  22,314
  23,385
  24,511
  25,696
  26,943
  28,255
  29,634
  31,083
  32,607
  34,209
  35,893
  37,662
Working capital, $m
  -5,048
  -5,232
  -5,430
  -5,642
  -5,869
  -6,111
  -6,367
  -6,640
  -6,929
  -7,235
  -7,559
  -7,902
  -8,263
  -8,645
  -9,048
  -9,472
  -9,919
  -10,390
  -10,886
  -11,409
  -11,958
  -12,537
  -13,145
  -13,785
  -14,458
  -15,165
  -15,908
  -16,690
  -17,511
  -18,375
Total debt, $m
  5,168
  5,272
  5,384
  5,504
  5,633
  5,770
  5,915
  6,070
  6,233
  6,407
  6,590
  6,784
  6,989
  7,205
  7,433
  7,674
  7,927
  8,194
  8,475
  8,771
  9,083
  9,410
  9,755
  10,117
  10,498
  10,899
  11,320
  11,763
  12,229
  12,718
Total liabilities, $m
  2,860
  2,964
  3,076
  3,197
  3,325
  3,462
  3,607
  3,762
  3,926
  4,099
  4,283
  4,477
  4,681
  4,898
  5,126
  5,366
  5,620
  5,887
  6,168
  6,463
  6,775
  7,102
  7,447
  7,810
  8,191
  8,591
  9,013
  9,455
  9,921
  10,410
Total equity, $m
  318
  329
  342
  355
  369
  385
  401
  418
  436
  455
  476
  497
  520
  544
  570
  596
  624
  654
  685
  718
  753
  789
  827
  868
  910
  955
  1,001
  1,051
  1,102
  1,157
Total liabilities and equity, $m
  3,178
  3,293
  3,418
  3,552
  3,694
  3,847
  4,008
  4,180
  4,362
  4,554
  4,759
  4,974
  5,201
  5,442
  5,696
  5,962
  6,244
  6,541
  6,853
  7,181
  7,528
  7,891
  8,274
  8,678
  9,101
  9,546
  10,014
  10,506
  11,023
  11,567
Debt-to-equity ratio
  16.260
  16.010
  15.750
  15.500
  15.250
  15.000
  14.760
  14.520
  14.290
  14.070
  13.850
  13.640
  13.440
  13.240
  13.050
  12.870
  12.700
  12.530
  12.370
  12.210
  12.070
  11.920
  11.790
  11.660
  11.540
  11.420
  11.300
  11.200
  11.090
  11.000
Adjusted equity ratio
  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
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  189
  216
  230
  245
  261
  278
  296
  315
  336
  357
  438
  462
  487
  514
  542
  572
  604
  637
  671
  708
  747
  787
  830
  875
  922
  971
  1,024
  1,078
  1,136
  1,196
Depreciation, amort., depletion, $m
  1,114
  1,152
  1,192
  1,236
  1,282
  1,332
  1,384
  1,440
  1,500
  1,562
  1,549
  1,620
  1,694
  1,772
  1,854
  1,941
  2,033
  2,130
  2,231
  2,338
  2,451
  2,570
  2,694
  2,825
  2,963
  3,108
  3,261
  3,421
  3,589
  3,766
Funds from operations, $m
  1,303
  1,368
  1,423
  1,481
  1,544
  1,610
  1,681
  1,756
  1,835
  1,920
  1,987
  2,082
  2,181
  2,286
  2,397
  2,514
  2,637
  2,766
  2,903
  3,047
  3,198
  3,357
  3,524
  3,700
  3,885
  4,080
  4,284
  4,499
  4,725
  4,963
Change in working capital, $m
  -171
  -184
  -198
  -212
  -227
  -241
  -257
  -273
  -289
  -306
  -324
  -342
  -362
  -382
  -403
  -424
  -447
  -471
  -496
  -522
  -550
  -578
  -608
  -640
  -673
  -707
  -744
  -782
  -821
  -863
Cash from operations, $m
  1,473
  1,552
  1,621
  1,693
  1,770
  1,852
  1,938
  2,028
  2,125
  2,226
  2,311
  2,424
  2,543
  2,668
  2,799
  2,938
  3,084
  3,238
  3,399
  3,569
  3,747
  3,935
  4,132
  4,340
  4,558
  4,787
  5,028
  5,281
  5,547
  5,826
Maintenance CAPEX, $m
  -1,000
  -1,035
  -1,072
  -1,113
  -1,157
  -1,203
  -1,252
  -1,305
  -1,361
  -1,420
  -1,483
  -1,549
  -1,620
  -1,694
  -1,772
  -1,854
  -1,941
  -2,033
  -2,130
  -2,231
  -2,338
  -2,451
  -2,570
  -2,694
  -2,825
  -2,963
  -3,108
  -3,261
  -3,421
  -3,589
New CAPEX, $m
  -351
  -378
  -406
  -435
  -464
  -495
  -526
  -559
  -593
  -628
  -664
  -702
  -741
  -782
  -825
  -870
  -917
  -966
  -1,017
  -1,070
  -1,127
  -1,185
  -1,247
  -1,311
  -1,379
  -1,450
  -1,524
  -1,602
  -1,684
  -1,769
Cash from investing activities, $m
  -1,351
  -1,413
  -1,478
  -1,548
  -1,621
  -1,698
  -1,778
  -1,864
  -1,954
  -2,048
  -2,147
  -2,251
  -2,361
  -2,476
  -2,597
  -2,724
  -2,858
  -2,999
  -3,147
  -3,301
  -3,465
  -3,636
  -3,817
  -4,005
  -4,204
  -4,413
  -4,632
  -4,863
  -5,105
  -5,358
Free cash flow, $m
  123
  140
  142
  145
  149
  154
  159
  164
  171
  178
  164
  173
  182
  192
  202
  214
  226
  239
  252
  267
  282
  299
  316
  334
  354
  374
  395
  418
  442
  467
Issuance/(repayment) of debt, $m
  -278
  104
  112
  120
  128
  137
  145
  154
  164
  173
  184
  194
  205
  216
  228
  240
  253
  267
  281
  296
  311
  328
  345
  362
  381
  401
  421
  443
  465
  489
Issuance/(repurchase) of shares, $m
  197
  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  
  -81
  104
  112
  120
  128
  137
  145
  154
  164
  173
  184
  194
  205
  216
  228
  240
  253
  267
  281
  296
  311
  328
  345
  362
  381
  401
  421
  443
  465
  489
Total cash flow (excl. dividends), $m
  41
  244
  255
  266
  278
  290
  304
  319
  335
  351
  348
  367
  387
  408
  430
  454
  479
  506
  533
  563
  594
  626
  661
  697
  735
  775
  817
  861
  907
  956
Retained Cash Flow (-), $m
  -385
  -12
  -12
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -22
  -23
  -24
  -25
  -27
  -28
  -30
  -31
  -33
  -35
  -36
  -38
  -40
  -42
  -45
  -47
  -49
  -52
  -54
Prev. year cash balance distribution, $m
  68
  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
  35
  36
  37
  39
  40
  42
  43
  45
  47
  49
  51
  54
  56
  59
  61
  64
  67
  70
  74
  77
  81
  85
  89
  93
  98
  103
  108
  113
  119
  124
Cash available for distribution, $m
  -277
  233
  242
  252
  263
  275
  288
  302
  316
  332
  327
  345
  364
  384
  405
  427
  451
  476
  502
  530
  559
  590
  622
  656
  692
  730
  770
  812
  856
  902
Discount rate, %
  13.70
  14.39
  15.10
  15.86
  16.65
  17.49
  18.36
  19.28
  20.24
  21.25
  22.32
  23.43
  24.60
  25.83
  27.13
  28.48
  29.91
  31.40
  32.97
  34.62
  36.35
  38.17
  40.08
  42.08
  44.18
  46.39
  48.71
  51.15
  53.71
  56.39
PV of cash for distribution, $m
  -243
  178
  159
  140
  122
  105
  89
  74
  60
  48
  36
  28
  21
  15
  11
  8
  5
  3
  2
  1
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0

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 17.5
Price to Sales 1.1
Price to Book 2
Price to Tangible Book
Price to Cash Flow 12.2
Price to Free Cash Flow 16.8
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 $5772 million for the last fiscal year's total revenue generated by First American Financial. The default revenue input number comes from 2017 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 3.5% 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 13.7%, 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 90.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 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 5.4% 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 0.6%.

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 173.2%.

Life of production assets of 10 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 -84.5%. 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 - $0 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 112 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 $6.1 billion.

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▶ First American Financial posts 4Q profit   [07:19AM  Associated Press]
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