Although the efficient market hypothesis states that when new information comes into the market, it is immediately reflected in stock prices and thus neither technical nor fundamental analysis can generate excess returns, Fidelity National Financial (FNF) suggests markets can, in fact, be irrational and sometimes inefficient. The stock is down -19.76% YTD. One reason the stock might be beaten down, in addition to the recent fear in the markets, may be that FNF is perceived as a ”real estate company” that will suffer by a decrease in home sales and therefore insurances. I beg the differ. Not only are rising interest rates good for the profitability of insurers (such as FNF), there is additonal value to be found.
Fidelity National Financial, Inc. is an insurance and settlement services company. It was originally founded in 1848 as the Western Title Insurance Company. Based in Jacksonville, Florida, the firm serves customers throughout the US and is listed on the NYSE under the ticker FNF. In short, FNF is a clear pure asset play that is highly undervalued because the combined market capitalization of their assets is less than the value of their current outstanding shares (i.e. their assets are worth more than their all their stock combined). You could buy the entire outstanding supply of the shares, sell all the assets and keep the profits from sales. In my analysis below, I will clarify my statements regarding the value of FNF, but at first we notice several key points that highlight the potential value investing in Fidelity National Financail (FNF) as per Yahoo Finance:
- FNF currently has a PE ratio of 4.88, a share price of $41.21 and a marketcap of $11.571B.
- FNF pays a dividend of $1.76, or a dividend yield of 4.31%.
- Revenues have doubled since FY18 and grown by 50% from FY20 to FY21.
- Net profit has increased by +300% since FY18.
- At $3.88B cash and 281.117M shares outstanding as of Q1 22, this leads to a value of $13.80 cash per share.
- In FY21, the company has earned FCF of $3.959B and free cash flows have grown by +300% since FY2018.
- With 281.117M shares outstanding, the company is earning $14 free cash flow per share. With a share price of $41.21, this leads to a P/FCF ratio of 2.92.
- The company has above industry average margins and growth in revenues and earnings.
- Total revenues at F&G (a subsidiary of FNF) were $2.6B during the quarter, up 57% year over year! driven by continued expansion in new channels.
- F&G: Institutional sales of $1.1 billion include a $527 million pension risk transfer transaction and $600 million of funding agreement issuances versus $125 million funding agreement issuance in the year-ago quarter, reflecting expansion in new markets.
So what have we learned so far? We know the stock price is down nearly 20% YTD (since 01-01-2022). We furthermore know that the stock trades at a valuation of only PE 4.88, PS of 0.76 and P/FCF of only 2.92. The fundamentals are d*mn rock solid. The company is loaded with cash $3.88B and is earning nearly $4B in free cash flow a year. But if all this wasn’t enough to make you buy the stock, please consider that FNF is planning to spinoff their F&G business. If you are familiar with my work, you know I love spinoffs. Why? Because spinoff companies are one of the most underfollowed and misunderstood situations in the stock market that provide the best returns for the investor who is able to think correctly and independently.
2. THE F&G SPINOFF
In March 2022, Fidelity National Financial Inc. said it plans to spin off to its shareholders 15% of the common stock of its wholly owned F&G Annuities & Life Inc. subsidiary through a dividend. The distribution was approved by Fidelity National Financial’s board of directors. The separation is intended to be structured as a taxable dividend to Fidelity National Financial shareholders and is targeted to be completed in the third quarter of 2022, the company said. The Board of Directors believes that the public listing of F&G shares through a dividend to FNF shareholders will unlock the value of both industry leading businesses! William P. Foley, II, Chairman of the Board of FNF, commented:
“F&G has exceeded all of our expectations having grown assets under management by 38% to $36.5 billion since our acquisition in June of 2020 and proving our strategic rationale for the deal. FNF’s balance sheet allowed a credit ratings upgrade of F&G and accelerated its growth by entering new distribution channels. While this has played out much better than we had expected, the market has not recognized the value creation that has taken place at F&G. We believe that the best way to unlock this value is to publicly list F&G through a dividend to our shareholders.”
Chris Blunt, President and Chief Executive Officer of F&G, added: ”F&G provides our Company with a countercyclical revenue stream that is poised to benefit from the current environment as interest rates rise. Additionally, as F&G has entered new markets, sales growth has accelerated and assets under management have grown well ahead of our expectations. This positions F&G to provide strong cash flows and earnings to FNF over the coming years. By retaining 85% ownership of F&G, we will continue to benefit from their growth while also unlocking the substantial value that has been and will continue to be created.”
Here the opportunity comes where you break out your first-grade math skills. By doing this simple math, you now know 2 things. Of course, you know the value of the 85% stake in F&G and you therefore also know the value the market places on all the rest of FNF’ businesses. Lets dive in a little deeper.
From their Q1 2022 press release, Fidelity National Financial gives us insight into the F&G subsidiary. We note the following:
- F&G is a leading provider of insurance solutions serving retail annuity and life customers and funding agreement and pension risk transfer institutional
- Total sales of $2.6 billion for the first quarter, an increase of 57% over the first quarter 2021 and an increase of 18% over fourth quarter 2021; reflects successful execution of F&G’s diversified growth strategy and a disciplined approach to pricing.
- Average assets under management (AAUM) of $37.5 billion for the first quarter, an increase of 29% from $29.0 billion in the first quarter 2021, driven by net new business asset flows. Ending assets under management were $38.6 billion as of March 31, 2022.
- Net earnings attributable to common shareholders for F&G of $236 million for the first quarter, compared to $289 million for the first quarter of 2021.
From their Q4 2021 press release, we furthermore note the following:
- Total sales record of $9.6 billion for the full year of 2021, an increase of 98% over the full year 2020.
- Net earnings for F&G for the full year of 2021 of $865 million
- Total sales of $2.2 billion for the fourth quarter, an increase of 50% over the fourth quarter 2020
Considering the FY21 total sales of $9.6 billion, the Q1 22 total sales of $2.6 billion, the revenue growth of 57% over the first quarter 2021 and the 98% increase in revenues compared to the full years 2020, we estimate the total sales of F&G to be at least $10 billion in 2022. We furthermore estimate the 2022 earnings to be at least equal or larger than the 2021 earnings of $865 million. When we consider a PS ratio of 1.0, the $10 billion in sales would lead to a valuation of $10 billion for F&G. Based upon various PE ratios, we can furthermore estimate the valuation of F&G, as shown below in Table 1.
The PE ratio of a high growth firm is a function of the expected extraordinary growth rate – the higher the expected growth, the higher the PE ratio for a firm. We can therefore argue that a PE ratio of 4.88 for F&G is significantly below what could resonable be expected based upon their growth rates. At a PS ratio of 1.0 (i.e. a ratio of 1.0 means you are paying $1 for every $1 in sales) would bring the valuation of F&G towards $10 billion, or a corresponding value of (10000/281.117) = $35.57 per share of FNF. As shown in the Table above, any valuation above PE ratio of 8 would mean that investors are able to buy the FNF shares, subtract the cash per share, subtract the value of the F&G business and receive the entire business of FNF for only $2.80 per share (or a PE ratio of 0.33). A PE ratio of 8 for F&G could even be conservative considering the growth rates of F&G. We furthermore notice that both sales and earnings are growing significantly and that in our analysis, we have assumed no growth in both sales and earnings in FY22, which seems highly unlikely. Whether you value the company based upon a PS ratio, a PE ratio of 4.88 or a PE ratio of 8, one thing is clear: investors clearly do not understand and/or are unable to value what is beneath the surface at Fidelity National Financial, as the stock is highly undervalued.
3. CALCULATING OUR POTENTIAL RETURN
From their Q4 2021 press release, Fidelity National Financial, we note the following:
- Total net earnings attributable to common shareholders of $2.422 billion. If we then subtract the net earnings of $865 million for F&G, we end up with net earnings of $1.557 billion for FNF for the FY21. We furthermore note that the 4 year average net earnings are $1.384 billion, and that F&G is only bought in 2020 by FNF. FY19 net earnings are $1.062 billion.
- FNF is valued at $7.5 billion if we consider the $1.557 FY21 net earnings and a PE ratio of 4.88. FNF is valued at $5.18 billion if we consider the $1.062 FY19 net earnings and a PE ratio of 4.88. FNF is valued at $6.75 billion if we consider the $1.384 average earnings and a PE ratio of 4.88. For conservative purposes, we value the FNF business therefore at $5 billion, or $17.78 per share.
- From our analyis in Chapter 1 above, we notice that FNF currently holds $3.88 billion cash, which constitutes to $13.80 cash per share.
- From our further analysis in Chapter 2 above, we notice that we value the F&G spinoff at $6.920 billion based upon a PE ratio of 8.
We note that investors receive 15% of F&G as a stock dividend, which is around $1.038 billion $3.69 per share of FNF. For conservatism we round this per share number to $3.5 per share of FNF. We furthermore note that FNF holds 85% of F&G, which is around $5.882 billion, $20.92 per share of FNF. For conservatism we round this per share number to $20 per share of FNF. We can use the above information in Table 2 below in order to calculate the most conservative share price and return for buying FNF stock at $41.21.
Based upon the table above, we note that the most conservative return achievable per Q3 2022 is 33.65%. This return assumes no growth in revenues and earnings for both firms, low PE ratios and low valuations. For the case of comparison, please note that if we value F&G at a PE ratio of 10 and therefore at $8.65 billion, and we value FNF at $7 billion (FY21 earnings and PE ratio of 4.88), the total valuation is nearly $20 billion, or nearly $70 per share and a 68.5% return. And that all with a FNF PE ratio of 4.88, and assuming no growth in earnings for FY22.
I advice investors to read the investment analysis again, and perhaps introduce their own numbers and projections for FNF in the calculations above in order to calculate their own fair value of FNF. In short, however, FNF is a clear pure asset play that is highly undervalued because the combined market capitalization of their assets is less than the value of their current outstanding shares (i.e. their assets are worth more than their all their stock combined). You could buy the entire outstanding supply of the shares, sell all the assets and keep the profits from sales.
In March 2022, Fidelity National Financial Inc. said it plans to spin off to its shareholders 15% of the common stock of its wholly owned F&G Annuities & Life Inc. subsidiary through a dividend in Q3 2022. The market has not recognized the value creation that has taken place at F&G and the Board of Directors therefore believes that the public listing of F&G shares through a dividend to FNF shareholders will unlock the value of both industry leading businesses! Although F&G has grown significantly in the recent years, this is not reflected in the stock price. The fair value of FNF, using our most conservative predictions and calculations, leads up towards an valuation of $55 per share, or a 33.65% return. Since the spinoff is to completed in Q3 2022, this provides investors with an annual return of up to +100%. In the current turbulent market, at the share price of $41.21, I am patiently adding to my position, waiting untill the market correctly values both industry leading businesses in Q3 2022.
Eurykleia Investments is not a registered investment, legal or tax advisor or a broker/dealer. All investment/ financial opinions expressed by Eurykleia Investments are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that the all information is accurate and up to date, occassionally unintended error and misprints may occur.