FAF Stock Trading at a Discount to Industry at 1.30X: Time to Hold?

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The insurer has a market capitalization of $7.32 billion. The average volume of shares traded in the last three months was 0.9 million. The insurer has a solid track record of beating earnings estimates in the past four quarters, with an average of 23.6%.

Shares of some other insurers like RenaissanceRe Holdings Ltd. RNR, NMI Holdings Inc. NMIH and Axis Capital Holdings Limited AXS are also trading at a discount to the industry average.

FAF is an Outperformer

First American shares have risen 16.7% year-to-date, outperforming the industry’s growth of 4.4%.

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Shares of RNR, NMIH and AXS have gained 31%, 8.2% and 16.8%, respectively, year-to-date.

Average Target Price for FAF Suggests Upside

Based on short-term price targets offered by five analysts, the Zacks average price target is $88.20 per share. The average suggests a potential 23% upside from the last closing price.    

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FAF’s Growth Projection Encourages

The Zacks Consensus Estimate for First American’s 2026 earnings per share (EPS) indicates a year-over-year increase of 16%. The consensus estimate for revenues is pegged at $8.1 billion, implying a year-over-year improvement of 8.5%.

The consensus estimate for 2027 EPS and revenues indicates an increase of 4.8% and 6.4%, respectively, from the corresponding 2026 estimates.

The expected long-term earnings growth rate is 15.2%, outperforming the industry average of 7.2%.

Optimist Analyst Sentiment on FAF

The company has witnessed three upward earnings estimate revisions for 2026 and 2027 over the past 30 days compared to one downward revision. Thus, the Zacks Consensus Estimate for 2026 and 2027 earnings has moved up 4% and 2.9%, respectively, over the same period.

FAF’s Efficient Use of Shareholder Capital

First American’s trailing 12-month return on equity of 13.3% compared favorably with the industry’s 7.8%, reflecting the company’s efficiency in utilizing shareholders’ funds.

Key Drivers of FAF Stock

First American remains well positioned for long-term growth as demand for title insurance and settlement services continues across residential and commercial markets. While residential activity remains subdued, strong commercial demand is offsetting weakness. In the second quarter of 2026, commercial revenues rose 34% year over year to $314 million, while revenues per order increased 31% to $19,980.

First American's large-scale, strong agent network, proprietary title data and established brand create barriers to entry and support its competitive position. Its technology investments also benefit from this extensive data and established workflows. The company has further growth potential through agent banking, with First American Trust serving 310 title agents in the second quarter of 2026, up 37% year over year compared to a market of around 20,000 agents.

The company is deploying AI across its operations through platforms such as Endpoint, SEQUOIA, Exam Assist QC and ServiceMac, which are reducing manual work and improving customer service. Automation rates continue to rise, with Endpoint reaching 39% in July 2026, while SEQUOIA’s refinance automation increased to 40%. The company plans broader U.S. expansion through 2027, supporting lower costs, margin improvement and long-term earnings growth.

Higher investment income continues to support earnings growth. The company is benefiting from rising deposit balances, including commercial escrow, 1031 exchange and agent banking deposits, while optimizing its investment portfolio toward higher-yielding securities.

As of June 30, 2026, First American maintains strong financial flexibility, with $2.6 billion in cash, $10.7 billion in investments and $5.6 billion in equity. Free cash flow rose 32% year over year to $285 million in the first half. Strong liquidity supports strategic acquisitions, dividends and share repurchases. Its dividend yield and payout ratio are better than the industry average, making it an attractive pick for yield-seeking investors.

Risks for FAF

Elevated mortgage rates, affordability challenges and low housing inventory continue to pressure home purchase activity and title insurance revenues.

FAF's strong dependence on commercial title insurance also remains a risk. A slowdown in commercial real estate transactions could weigh on FAF's revenue growth and earnings.

Conclusion

Strength in commercial business, rising investment income, continued investments in technology and disciplined capital deployment should favor FAF’s results. However, a weak residential housing market and dependence on commercial title are headwinds.

FAF’s VGM Score of A instils confidence. Given attractive valuation, solid growth projections, optimistic analyst sentiment and higher ROE, it is wise to retain this Zacks Rank #3 (Hold) insurer. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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