Description

Capital Title Group (CTGI) is a regional title agency with offices in Arizona, California, and Nevada. If you are convinced that we are in the midst of a real estate bubble and/or rates are headed sharply higher in 2003, you will probably want to pass on this idea. However, I believe that management has planned for a slowdown in the refinance market and upside guidance to their 2003 earnings projection will be announced in March.
In the present business climate it is difficult to find companies reporting huge earnings increases from the prior years comparable quarter. Capital Title announced on January 28th that they expected their earnings to for the three month period ending Dec 31st to come in at .21 versus .06 in 2001. What is impressive about this is that they had given guidance of .10-.13 for the Dec quarter in early November. In that same November guidance statement they projected 2003 earnings to be .40-.50 per share. My guess is that Capital Title will raise their guidance in March for 2003 to .60+, giving them a projected multiple of 4.6 based on the current price. This compares favorably to the industry multiple of slighty over 8.
Capital Title completed a significant merger when it recently acquired Nations Holding Group efective Sept 1, 2002. What was significant in the merger was that the acquisistion gave Capital Title new underwriting capibilities in its existing operations. That means that it does not have to pay a third party company for the underwriting and more profit will flow to the bottom line.
One advantage that Capital Title has over its competitors is that they have the technology in which one person takes the title process from start to finish. This allows the company to process orders in 4 days versus the industry average of two weeks.
Risks:
I generally dislike getting involved with a comapny that just completed a large aquisition. At the end of of Sept qtr, Capital Title had roughly 15 million of shareholder equity. the aquisition of Nations was a 37 million dollar event so Capital Title needs to get it right. Fortunately they have known the principals of Nations for years so I don't believe there will be any surprises. In addition, they are not moving outside their core competence. The fact that the earnings estimate was dramatically raised after the acquisition, is a good sign obviously. Offsetting the risk somewhat is that Capital Title's costs are roughly 50% variable so they can adjust to a downturn quite rapidly. In addition, since they see their orders 30-45 days out they have more time to position themselves compared to most industries.
Another risk is the small size of the company. They may execute like I have detailed above and still not be noticed.

Catalyst

I think that the company will bring some positive attention to itself in March with its earnings announcement and hopefully give updated guidance. The Chairman recently purchased $70,000 on the open market which could also confirm the positives that I covered.