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Stewart Information Services: Series Of Acquisitions But Depleting Revenues A Concern

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Thesis & Introduction

Stewart Information Services Corporation (NYSE:STC) knowledgeable minimal gross maturation for 10 years, up until 2019, but saw an awesome summation of much than 30% done 2022. During this time, nan institution acquired complete 20 companies to grow into appealing title markets, heighten existent property services, and amended their exertion to heighten customer satisfaction. Despite these efforts, STC's gross decreased by astir 10% successful 2022 compared to nan erstwhile year, pinch a important 50% driblet successful nett income. Analysts foretell this inclination will persist successful 2023, and nan institution whitethorn not spot gross maturation until 2025. STC took connected $450 cardinal successful indebtedness successful 2021 to make these acquisitions, causing their debt-to-equity ratio to surpass nan manufacture median of 38.3% to 43.4%. This has besides accrued its expenses by astir $14M annually, further affecting its margins.

Revenue by conception for 2021 and 2022

Form 8-K, Feb 2022

STC provides services done 3 segments: 1) title insurance, 2) existent property solutions, and 3) firm and different insurance. Title security protects lenders and homebuyers against nonaccomplishment aliases harm from liens, encumbrances, aliases defects successful a property’s title aliases existent ownership. Its title security conception accounts for complete 90% of its full revenue. It bids good for nan institution arsenic it holds much than 10% marketplace stock successful title security and existent property services. The title conception is responsible for examining and ensuring nan information of nan title, and besides offers location and individual security services, tax-deferred exchanges, and integer customer engagement level services. The different 2 segments supply appraisal management, online notarization and closing, in installments and existent property information, and hunt and valuation services to nan owe industry.

Title Market Share

Investor Presentation 2022

Industry study and title

As you tin spot successful nan floor plan mentioned above, STC’s biggest competitors are Fidelity National Financial (FNF), First American Financial Corporation (FAF), and Old Republic International Corporation (ORI). Even aft having a marketplace stock of 10%, Stewart stands past amongst its awesome peers. Though successful position of its maturation and performance, STC is conscionable adjacent to FNF pinch a 5Y compounded yearly maturation complaint aliases CAGR of 9.4% successful gross and 3Y CAGR of 27.3% successful nett income which is head-to-head pinch that of FNF while its different counterparts person antagonistic maturation successful nett income.

Comparing maturation of STC pinch its peers

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Growing dividends and synergies

Stewart Information Services, contempt gross fluctuations, has exhibited a singular way grounds of dividend payments since 1989, pinch only a trifling interruption aft nan dotcom illness successful 2000. Moreover, successful nan past 5 to 7 years, nan corp has markedly raised its dividend payouts, elevating its output from beneath 1% earlier 2015 to complete 3% while achieving an awesome 3Y CAGR of 11.2%. This is 3 times nan manufacture average. While gross and net projections for 2023 whitethorn lead to nary dividend growth, it seems apt that nan institution will support its coming level of dividend disbursements. In 2022, nan endeavor prudently implemented cost-cutting measures to incorporate operating expenses, thereby mitigating financial accent connected its income statement. As antecedently noted, nan institution made a whopping 20 acquisitions successful nan past 3 years, propelling STC's description exponentially erstwhile nan existent recessionary situation dissipates. Following is simply a glimpse of those acquisitions and nan worth summation they bring:

Acquisitions made by STC and its worth addition

Investor Presentation 2022

Please statement that STC does not clasp 100% liking successful each nan companies. It varies for each of them.

Weak outlook and debased revenue

Stewart Information Services Corporation has been enduring unfavorable trends successful net per stock and gross revisions by manufacture analysts, peculiarly successful comparison to its peers. This reality was reinforced during nan Q4 2022 net call by nan company's CEO, Fred Eppinger, who attested to nan upcoming formidable challenges that nan first 4th of 2023 would bring, conscionable for illustration nan erstwhile quarter. One of nan astir salient stumbling blocks for Stewart will beryllium nan daunting task of breaking into nan title marketplace of California and New Jersey, wherever competitors person a stranglehold. California and New Jersey rank among nan apical states for existent property transactions, successful position of worth and volume.

In position of momentum, nan stock's worth has plummeted by almost half since its highest of $80.14 astatine nan opening of 2022. Despite a 5Y beta of 1.11, nan banal fared worse than expected erstwhile nan S&P 500 scale declined and performed sub-optimally during a bull market. This indicates a greater susceptibility to company-specific risks arsenic opposed to marketplace risks. As nan Federal Reserve remains hawkish and each indicators propose that ostentation is improbable to abate soon, nan banal value whitethorn look much aggravated unit successful Q2 and Q3 of 2023. Additionally, Seeking Alpha's Quant rating has consistently hovered astir D passim nan mostly of 2022, concisely improving to B and C during a coagulated betterment successful January 2023, only to revert to D past week.

Total return of STC compared to S&P 500, FAF, FNF, and ORI

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Valuation

As I discussed successful my past article wherever I analyzed a multi-line security company, I affirmed that book worth multiples person demonstrably outperformed earnings-based multiples successful nan realm of comparative valuation successful nan past. However, this method whitethorn not beryllium a suitable metric successful STC's case, for 2 reasons. Firstly, STC has a highly specialized security business that besides provides ancillary services successful nan existent property sector. Secondly, and astir importantly, nan company's tangible book worth per stock stands astatine a meager $0.62 successful comparison to its book worth of $50.21. This is because STC's acquisitions person amplified its nett intangible assets by $1 cardinal while besides expanding its indebtedness by $350 million. Consequently, I person resorted to utilizing nan P/E ratio to cipher nan company's intrinsic value.

The mean P/E ratio for nan trailing 12 months TTM successful nan spot and casualty security manufacture is 18x. This comes down to 14.6x for Stewart's peers, namely FAF, FNF, and ORI, who relationship for almost 75% of nan marketplace stock successful which STC operates. I person adopted 14.6x arsenic nan due fig for STC's P/E ratio.

Moreover, normalized nett income proves to beryllium a much reliable parameter arsenic it excludes bonzer items specified arsenic nan ineligible colony that nan institution made successful 2022 concerning its grounded merger pinch Fidelity National. Consequently, nan company's nett normalized income for 2022 amounts to $125.9 million.

Particulars

Value

Normalized nett income

$125.9

P/E GAAP TTM

14.6x

Value of equity

$1,835.8

Number of outstanding shares

27.1

Intrinsic value

$67.7

Based connected nan existent value of $45.68 nan stock is undervalued by astir 33%.

The Bottom Line

Stock Tracking Opinion

STC is simply a fundamentally beardown institution pinch an A standing from AM Best (the apical in installments standing agency for insurance) for its financial spot and an A standing from Fitch (one of nan apical in installments standing agencies) for its long-term, justifying a very debased default risk. Though nan existent interest for nan institution revolves astir enhancing nan marketplace stock and expanding revenue. Acquisitions made by STC tin thief nan institution execute this goal, but it will return longer than 1 mightiness think. Hence, I will support STC connected my watchlist and reassess my position aft its first aliases second-quarter results.

Investment Opinion

Wall Street analysts urge buying STC, while nan Quant standing shows a waste rating. However, I judge nan adjacent fewer quarters could beryllium challenging. Based connected my analysis, moreover though I see it undervalued, my existent sentiment connected STC banal is simply a Hold.

This article was written by

Arpit Sathavara floor plan picture

I americium presently an Investment Research Intern astatine Sungarden Investment Publishing and pursuing an MS successful Finance from nan Stevens Institute of Technology. With an acquisition of much than 3 and half years successful nan section of Finance & Audit, I person developed a knack and liking successful Qualitative and Quantitative Analyses of Companies to publication beyond nan numbers and find untold stories of those companies.Closely associated pinch writer Modern Income Investor.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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