Description

Stewart Information Services Corporation (STC) writes title insurance policies and sells real estate related information services. These information services include title reports, flood determinations, property appraisals, surveys, document preparation, property reports, and background checks. STC currently trades at about 17.60 per share on the NYSE. STC trades at a trailing 12 month P/E of 5.9.

STC's major competitors are Fidelity National Financial, Inc. (FNF), First American Corp. (FAF), LandAmerica Financial Group, Inc. (LFG), and to a lesser extent, Investors Title Company (ITIC).

STC's earnings per share averaged over the last nine years (1993 through 2001) has been $1.54 per share or a P/E of 11.4 using the current stock price.

The earnings of this company, and all the title companies have been highly cyclical. The biggest driver is changes in mortgage rates and the resulting affect on rates of refinancings and new home purchases. The stock prices have been almost as cyclical, reflecting the lack of earnings stability. But STC is conservatively financed and is in a line of insurance that does not seem to have a high level of underwriting risk. The business seems like a safe bet to weather any economic problems, and to generate a slowly growing, albeit choppy, earnings stream.

STC's book value was $21.97 per diluted share (12/31/2001), thus price to book is 0.8. Subtracting goodwill results in a tangible book value of $19.02 per diluted share; price to tangible book of 0.92. In addition to this book value, I estimate STC has about $8.86 per share in float (see calculation below). This float will likely grow over time, just as book value has grown. I would give STC an intrinsic value of its tangible book plus half its float, or $23.45 per share. Thus it is selling at 75% of intrinsic value.

My float calculation. $202.5 million liability for title loss minus $51.4 million one year title loss provision plus $8 million one year excess of loss provision over losses paid out. This results in $159 million of float. With 17.959 diluted shares in the fourth quarter of 2001, the result is $8.86 per share. The liability is as of 12/31/01. The title loss provision is the actual from 2001. The excess of loss provision over losses paid out is my estimate for 2001 (cash flow statement hasn't yet been released) based on the similar numbers from 2000 and 1999.

Negatives:

1) Cyclical earnings.

2) STC added 2.3 million shares in the fourth quarter.

">">

Catalyst

I never see a catalyst, except in special situations. While not dirt cheap, STC is selling at a discount, and should be a safe, long term, grower. ">">