Are Fidelity National Earnings Missing Out on Housing's Bounce?

Fidelity National Financial will release its quarterly report next Monday, and given the recent experience in the housing market, you'd think investors would expect a title-insurance company to benefit from increased activity in home purchases. But instead, they're expecting to see Fidelity National earnings actually fall from year-ago levels. What's behind the drop?

The explanation comes from the fact that Fidelity National is more than just a title insurer. The company also owns restaurant chains including O'Charley's, Ninety-Nine Restaurants, and Village Inn, as well as personnel management company Ceridian, employee benefits agency Digital Insurance, and automotive parts-maker Remy International. Let's take an early look at what's been happening with Fidelity National Financial over the past quarter and what we're likely to see in its quarterly report.

Stats on Fidelity National Financial

Analyst EPS Estimate

$0.62

Change From Year-Ago EPS

(4.6%)

Revenue Estimate

$2.25 billion

Change From Year-Ago Revenue

30%

Earnings Beats in Past 4 Quarters

3


Source: Yahoo! Finance.

What's down with Fidelity National earnings this quarter?
Analysts have actually gotten more optimistic about prospects for Fidelity National earnings in recent months, boosting their June-quarter estimates by $0.03 per share and their full-year 2013 consensus by more than twice that amount. The stock, though, has fallen by about 8% since late April.

The big news for Fidelity National came in late May, when the company made a $2.9 billion bid to buy Lender Processing Services . The half-cash, half-stock offer would help round out Fidelity National's core title insurance business by incorporating its technology and analytics offerings to mortgage companies and real-estate businesses, tightening its hold over the key components of the home-buying process. Fidelity National believes that between cost synergies and other benefits, the purchase should add to its earnings immediately, having identified pro forma 2012 gains of more than 11%. Yet the most interesting thing about the transaction is that it represents a round trip for Lender Processing investors, with Fidelity National having spun off Fidelity National Information Services , which then in turn spun off Lender Processing, only to have what's essentially its grandparent corporation buy it back up.

Fidelity National faces a brand-new headwind from higher mortgage rates, which hurt the company's stock in June. Because title insurance is typically a necessary part of mortgage refinancing, title insurers benefited from the explosion in refinancing activity that has accompanied rock-bottom interest rates in recent years. Yet both Fidelity National and rival First American Financial have come under pressure as rates soared in May and June, with fears that reduced transaction volume will hurt their core title-insurance businesses.

Still, Fidelity National is on the move to continue diversifying its holdings. Just yesterday, it exercised an option to invest $4 million more in tiny Ecosphere Energy Services, bringing its ownership interest up to 39%, and Fidelity National has the option to take a majority interest for another $6 million by the end of this year. With its water treatment and recycling business working to treat and recycle billions of gallons of water for oil and gas drillers across the nation, Ecosphere is trying to tap into an industry in which bigger players like Nuverra Environmental have found great success.

In the Fidelity National earnings report, look for a progress report on the Lender Processing transaction. With such a wide set of businesses, Fidelity National demands a close look from investors trying to evaluate the various trends among the industries it covers.

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The article Are Fidelity National Earnings Missing Out on Housing's Bounce? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends First American Financial. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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