Critical Analysis: Fairfax Financial (OTCMKTS:FRFHF) & First American Financial (NYSE:FAF)

Fairfax Financial (OTCMKTS:FRFHF) and First American Financial (NYSE:FAF) are both finance companies, but which is the better stock? We will contrast the two companies based on the strength of their earnings, institutional ownership, profitability, analyst recommendations, risk, valuation and dividends.

Institutional & Insider Ownership

10.4% of Fairfax Financial shares are owned by institutional investors. Comparatively, 89.1% of First American Financial shares are owned by institutional investors. 3.5% of First American Financial shares are owned by company insiders. Strong institutional ownership is an indication that large money managers, hedge funds and endowments believe a stock will outperform the market over the long term.

Earnings and Valuation

This table compares Fairfax Financial and First American Financial”s top-line revenue, earnings per share and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
Fairfax Financial	$31.60 billion	1.07	$4.77 billion	$202.33	7.80
First American Financial	$7.45 billion	0.92	$621.80 million	$6.51	10.30

Fairfax Financial has higher revenue and earnings than First American Financial. Fairfax Financial is trading at a lower price-to-earnings ratio than First American Financial, indicating that it is currently the more affordable of the two stocks.

Dividends

Fairfax Financial pays an annual dividend of $15.00 per share and has a dividend yield of 1.0%. First American Financial pays an annual dividend of $2.20 per share and has a dividend yield of 3.3%. Fairfax Financial pays out 7.4% of its earnings in the form of a dividend. First American Financial pays out 33.8% of its earnings in the form of a dividend. Both companies have healthy payout ratios and should be able to cover their dividend payments with earnings for the next several years. First American Financial has raised its dividend for 15 consecutive years. First American Financial is clearly the better dividend stock, given its higher yield and longer track record of dividend growth.

Analyst Ratings

This is a summary of current recommendations for Fairfax Financial and First American Financial, as reported by MarketBeat.com.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
Fairfax Financial	0	2	3	1	2.83
First American Financial	0	0	6	1	3.14

First American Financial has a consensus target price of $82.50, indicating a potential upside of 23.06%. Given First American Financial’s stronger consensus rating and higher possible upside, analysts clearly believe First American Financial is more favorable than Fairfax Financial.

Profitability

This table compares Fairfax Financial and First American Financial’s net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
Fairfax Financial	14.16%	15.05%	4.26%
First American Financial	8.73%	12.58%	3.98%

Risk and Volatility

Fairfax Financial has a beta of 0.53, suggesting that its stock price is 47% less volatile than the S&P 500. Comparatively, First American Financial has a beta of 1.28, suggesting that its stock price is 28% more volatile than the S&P 500.

Summary

First American Financial beats Fairfax Financial on 9 of the 17 factors compared between the two stocks.

About Fairfax Financial

Fairfax Financial Holdings Limited, through its subsidiaries, provides property and casualty insurance and reinsurance, and investment management services in the United States, Canada, Asia, and internationally. The company operates through Property and Casualty Insurance and Reinsurance, Life insurance and Run-off, and Non-Insurance Companies segments. It insures against losses to property from fire, explosion, earthquake, windstorm, flood, terrorism, boiler explosion, machinery breakdown, and construction defects, as well as underwrites automobile, commercial and personal property, and crop insurance. The company also offers workers' compensation, automobile, employer's liability, accident and health, medical malpractice, professional liability, and umbrella coverage insurance products; marine, aerospace, surety risk, and other risks and liabilities insurance products; and reinsurance products. In addition, it franchises, owns, and operates restaurants; retails sports lifestyle products; provides integrated travel and travel-related financial services, as well as advanced digital tools for agriculture; owns and operates holiday resorts; originates, processes, and distributes value-added pulses and staple foods; develops, manages, and invests in hospitality real estate. The company was formerly known as Markel Financial Holdings Limited and changed its name to Fairfax Financial Holdings Limited in 1987. Fairfax Financial Holdings Limited was incorporated in 1951 and is headquartered in Toronto, Canada.

About First American Financial

First American Financial Corporation, through its subsidiaries, provides financial services. It operates through Title Insurance and Services, and Home Warranty segments. The Title Insurance and Services segment issues title insurance policies on residential and commercial property, as well as offers related products and services internationally. This segment also provides closing and/or escrow services; products, services, and solutions to mitigate risk or otherwise facilitate real estate transactions; and appraisals and other valuation-related products and services, lien release and document custodial services, warehouse lending services, default-related products and services, document generation services, mortgage loans subservicing, and related products and services, as well as banking, trust, and wealth management services. In addition, it accommodates tax-deferred exchanges of real estate; and maintains, manages, and provides access to title plant data and records. This segment offers its products through a network of direct operations and agents in various states and in the District of Columbia, as well as in Canada, the United Kingdom, Australia, New Zealand, South Korea, and internationally. The Home Warranty segment provides home warranty products, including residential service contracts that cover residential systems, such as heating and air conditioning systems, and various appliances against failures that occur as the result of normal usage during the coverage period. This segment operates in various states and the District of Columbia. The company was founded in 1889 and is headquartered in Santa Ana, California.