Stewart Information Services Corp

NYSE:STC

Earnings Call Analysis

Current Company Performance in a Challenging Market

In its third-quarter results, Stewart reported a net income of $30 million, or $1.07 per diluted share, on total revenues of $668 million. This reflects an increase in adjusted net income to $33 million, up from $24 million in the same quarter last year. Despite facing a contracting housing market, where existing home sales dropped 3%, Stewart's focus on operational efficiencies and growth in key segments has led to a stable financial footing.

Segment Growth Drivers: Title and Real Estate Solutions

The title segment experienced a revenue growth of 6%, largely fueled by a $31 million increase primarily from domestic commercial and agency operations. In commercial, revenues soared by 30%, attributed to higher transaction sizes and an increase in average commercial fees per file, which grew from $14,200 to $17,700. Meanwhile, the real estate solutions segment also showed improvement, with pretax income rising to 7.7%, up from 3.8% in the previous year, enhancing overall performance metrics across segments.

Navigating Challenges with Strategic Focus

The company is actively addressing challenges such as reduced purchase orders and an overall sluggish residential market. Despite total closed orders declining by 2%, opened orders in the direct title business improved by 8%. The leadership remains optimistic, preparing for a rebound in the housing market while enhancing technology and services to support growth effectively. For 2024, Stewart expects title losses to average around 4%, reflecting a controlled risk approach.

Future Revenue Growth and Margin Outlook

Stewart aims to return to a 'normal' housing market where approximately 5 million homes are sold annually. The management anticipates maintaining low double-digit pretax margins around 11.5% under this scenario, a result of strategic investments made in operational efficiencies and market share growth. Direct operations are being managed to navigate the current market dynamics while retaining the potential for margin expansion as conditions improve.

Commitment to Shareholders and Long-Term Stability

In a show of confidence, Stewart announced a dividend increase from $1.90 to $2 per share, marking the fourth consecutive year of dividend growth, signaling its commitment to returning value to shareholders. With total stockholders' equity at about $1.4 billion and a strong cash position exceeding statutory reserve requirements, the firm demonstrates a solid foundation to weather market fluctuations.

Looking Forward: Market Dynamics and Strategic Initiatives

While the current environment presents challenges, there is optimism for growth as the company has set its sights on expanding its offering, particularly within targeted MSAs. Enhancements in customer experience through upgraded technologies and a commitment to improving agent partnerships are expected to foster a more resilient and competitive posture as market conditions evolve. Overall, Stewart is positioning itself well to leverage growth opportunities in a recovering market.

Earnings Call Transcript 2024-Q3

[Operator]

Hello, and thank you for joining the Stewart Information Services Third Quarter 2024 Earnings Call. [Operator Instructions] Please note that today's call is being recorded. [Operator Instructions] It is now my pleasure to turn today's conference over to Kath Bass, Director of Investor Relations. Please go ahead.

[Kathryn Bass, executive]

Thank you for joining us today for Stewart's Third Quarter 2024 Earnings Conference Call. We will be discussing results that were released yesterday after the close. Joining me today are CEO, Fred Eppinger; and CFO, David Hisey. To listen online, please go to the stewart.com website to access the link for this conference call.

This conference call may contain forward-looking statements that involve a number of risks and uncertainties. Please refer to the company's press release and other filings with the SEC for a discussion of the risks and uncertainties that could cause our actual results to differ materially.

During our call, we will discuss some non-GAAP measures. For reconciliation of these non-GAAP measures, please refer to the appendix in today's earnings release, which is available on our website at stewart.com.

Let me now turn the call over to Fred.

[Frederick Eppinger, executive]

Thank you for joining us today for Stewart's Third Quarter 2024 Earnings Conference Call. Yesterday, we released financial results for the quarter, which David will review with you shortly. I'd like to start the call by sharing our outlook on the overall housing market, followed by an update on the continued progress we've made in each of our core business lines.

Before jumping into these discussions, I wanted to take a moment to express our sympathies for the many people affected by Hurricane Helene and Hurricane Milton. Our thoughts are with the many communities impacted by these storms, and we have and we will continue to find ways to support these communities in their efforts to rebuild.

I am very pleased with the results for the quarter, given the continued contraction of the market. At the end of the quarter, we reached 37 consecutive months of year-over-year reduction in existing home sales. This quarter, we saw existing home sales decrease another 3%. In this environment, we continue to focus on growing our business and improving our operations and our offerings. We feel our performance reflects the efforts we have put in over the past 4 years on our journey. We remain dedicated to positioning ourselves well for the market recovery and feel confident that we will have significant upside in a more normalized market from the actions we have taken to improve the company.

This has been an interesting quarter for both the economy at large and housing in the U.S. While inventory has continued to improve over the past several months, the sentiment improved temporarily. The trend of historical low housing volumes lingers with just 2.5% of homes changing hands year-to-date through August, one of the lowest turnover rates we have experienced in the U.S. in decades.

Affordability remains a hardship and barrier to entry for many would-be buyers. In September, the Federal Reserve cut interest rates for the first time in 4 years, which resulted in some temporary green shoots by way of mortgage applications. But we see things leveling back off as mortgage rates have settled in around the mid-6% level and typical seasonality plays out.

All of this is on top of the upcoming elections, which lends to a continuation of a very choppy market. We remain, however -- our view remains, however, that '25 will be a transitional year, leading to a more normal housing market in '26, which we define as a 5 million of existing homes sold on an annual basis.

Turning to our operations. We remain focused on building an improved competitive position by executing upon a disciplined operating model while also identifying efficiencies to prepare ourselves for the market rebound. We are dedicated to growing share in attractive markets across all our lines of business, and we have positioned each business to do so.

We have made great advancements in improving our customers' experience in all channels through upgrades on our technology capabilities and operations. We have implemented technologies to enhance our title production processes and are working on utilizing technology to improve our data management and access. We continue to focus on attracting and retaining key talent. As we know, Stewart is becoming the best home for the industry-leading talent to grow with us as the market improves.

We've been diligent in managing our direct operations segment to protect our corner of the market and our margin as this segment most immediately feels the impact of a suppressed residential housing market. Strategically, our direct operation business remains focused on expansion efforts in targeted MSAs through both organic and inorganic means. We keep a pulse on the markets we are in as well as those we're not to ensure we are operating to our fullest potential across the country.

Choppy housing market conditions have slowed acquisition-related activity in recent history. However, we remain very positive about the future outlook for opportunities and maintain a warm pipeline in preparation for an improved market. Our top priority in this business is to grow our share in attractive markets.

Our commercial services businesses has been a strong performer over the last several quarters as we feel the positive effects of our efforts to grow our share in critical geographies and channels. We have made a lot of investments in talent across our commercial operations so that we have the right people in place to maximize our growth potential.

We are also investing in upgrading technology to support our business and to provide a better customer experience for our clients. We expect our commercial transaction momentum to continue, but we know near-term commercial market challenges may present themselves, depending on some of the economic variables that we previously mentioned.

Our agency team remains focused on driving share gains in attractive market -- agency markets by adding new agent partners as well as growing our share with existing agents. We are focused on improving our position, particularly in 15 target states and have seen solid progress in a number of these states already. Our improved support services and enhanced abilities around servicing commercial agents allows us to stand out to our agents. We will continue to build on these improvements to differentiate our service and offerings to better serve our agent partners.

Our real estate solutions business maintained solid financial results and growth in the third quarter. The real estate solutions team is focused on gaining share with the top lenders and cross-selling our products as we leverage our improved portfolio of services. The current market poses some challenge to our cross-selling initiatives. But overall, we continue to see share gains from both existing clients and new client introductions. We expect continued momentum in this space as the market improves.

Across the enterprise, we are thoughtfully managing all lines of business and remain intentional with our investment in expense management. We have experienced an increase in other operating expense percentages, driven by significant growth in two of our businesses, commercial and real estate solutions. In commercial, we account higher outside data search fees to service our customers. And in real estate solutions, other operating expenses are a higher percentage of mix due to use of outside services and data. To date, we are very pleased with the margins we are achieving from our meaningful growth in agency services, data solutions and in commercial.

Overall, we remain prudent in our expense management to ensure we achieve both near- and long-term goals. Our leadership team has an execution-based mindset that we feel will allow us to achieve low double-digit pretax margins as we return to a more normal 5 million unit purchase market.

We remain very positive about the long-term outlook for the real estate market and are focused on our journey to become the premier title services company. We believe in the strength of the company and are committed to fortifying Stewart for long-term growth and performance.

To reiterate this view, in September, we announced an increase in our annual dividend from $1.90 a share to $2 a share. This is the fourth year in a row we have increased our dividend to shareholders. We have and will continue to position ourselves well to be able to capitalize on the opportunities that this housing market will provide. I want to thank our customers and agent partners for their continued trust. We are committed to doing the best to serve you with excellence.

Finally, I'd like to end my remarks by extending my thanks to our employees. We will not be where we are today without the dedication of our employees and their commitment to bettering our company. Your efforts have had a tremendous impact on Stewart, and we are pleased to share this quarter that we were named as one of the 2024-'25 Best Companies to Work by U.S. News & World Report. Thank you for your loyalty and efforts on our journey.

David, I'll now turn it over to you to provide the update on our results.

[David Hisey, executive]

Good morning, everyone, and thank you, Fred. My deepest sympathies as well to those impacted by the hurricanes. I appreciate the outstanding service of our associates and have been grateful for the continued support of our customers.

As Fred noted, the market continues to be challenging, existing home sales struggled and mortgage rates came down about 50 basis points from mid-August to end of September but did not have a meaningful impact on volume, and it subsequently increased.

Yesterday, Stewart reported third quarter net income of $30 million or $1.07 per diluted share on total revenues of $668 million. As presented in the Appendix A of our press release, we use adjustments primarily for net realized and annualized gains and losses, acquired intangibles amortization and other expenses for additional performance measures. On an adjusted basis, third quarter net income was $33 million or $1.17 per diluted share compared to $24 million or $0.86 per diluted share in the third quarter of 2023.

In the title segment, total operating revenues improved $31 million or 6%, primarily driven by higher revenues from our domestic commercial and agency operations while our noncommercial revenues were comparable to the prior year quarter. Title segment pretax income improved by $10 million or 27%, primarily driven by higher revenues. After adjustments for purchase intangible amortization and other items, the title segment's adjusted pretax income was $43 million, which was slightly better compared to the prior year quarter, while adjusted pretax margins were comparable.

On our direct title business, total opened orders in the third quarter improved by 8% while total closed orders were 2% lower, primarily due to lower purchase orders resulting from the slower residential market as previously noted. Our domestic commercial operations generated another good performance with $16 million or 30% higher revenues, primarily due to higher transaction size and volume in the energy and multifamily sectors. Average commercial fee per file improved 25% to $17,700 compared to $14,200 in the prior year quarter. Domestic residential fee per file improved slightly to $3,000.

With our agency operations, gross agency revenues increased $17 million or 6% while net revenues improved $2 million, primarily due to a slightly higher average retention rate due to geographic mix. On title losses, total title loss expense decreased 4%, primarily due to a favorable claim experience, which also resulted in a slightly lower title loss ratio for this quarter versus the prior year quarter. For the full year 2024, we expect our title losses to average around 4%.

Regarding the real estate solutions segment, pretax income improved by $5 million, driven by higher revenues in our credit-related data and valuation services business. Pretax margin was 7.7% in the third quarter compared with 3.8% in the prior year quarter. And then excluding acquisition intangible, adjusted pretax margin in the third quarter was 13.4% compared to 13% last year.

On consolidated operating expenses, our employee cost ratio improved to 30% from 31% last year, primarily driven by higher revenues. Our other operating cost ratio increased to 24% compared to 22%, primarily driven by increased credit information and services expenses in our real estate solutions business and higher outside search costs in commercial. Recall, in our res businesses that they're very data-dependent, so as their revenues increase, our other operating expenses and ratio do as well.

Our financial position continues to be strong in support of our customers and employees in the real estate market. At September 30, 2024, our total cash and investments were approximately $370 million in excess of statutory premium reserve requirements. In addition, we also have a fully available $200 million line of credit facility. Total stockholders' equity at 9/30/2024 was approximately $1.4 billion with a book value of $51 per share. Our net cash provided by operations in the third quarter was $76 million, which was $17 million higher than the prior year quarter, primarily due to improved net income.

Again, thank you to all our customers and associates. We remain confident in our service to the real estate markets. And I'll turn it back to Fred for any questions or comments. No, I think we can go to questions, operator.

[Operator]

[Operator Instructions] We'll take our first question from Bose George with KBW.

[Bose George, analyst]

First, just on the commercial fee profile, there's obviously a big increase year-over-year. Is that just larger deals that you're seeing in the market? Or was there any benefit from the New York Title acquisition just in terms of the deal sizes they were doing there?

[Frederick Eppinger, executive]

It is just because of the mix of business and it's a little bouncy. But this year, because we've obviously had outsized growth and it's kind of broad-based in the categories, but the category that's the biggest is our energy. And the alternative energy deals tend to be larger, right? And so that kind of skewed the average deal size a little bit. But it is a little bit of a balancing number quarter-to-quarter. But again, it's -- from the mix I'd look at what closings this month, it has a lot -- or this quarter has a lot to do with the energy percent.

[Bose George, analyst]

Okay, great. And then actually, if I look at your -- the order count, that other segment ramped up relative -- I mean, stronger than the purchase and refi. Can you remind me, is there some sort of geography issues there, where stuff that might have gone through purchase and refi kind of go through there now? Or is there...

[Frederick Eppinger, executive]

Yes. So that's driven a little bit by our bulk business, which if you have a big deal, there's some fluctuation in volumes. In this quarter, we had a couple of large transactions. So it's a little bit bumpy because of the -- where those deals are.

[David Hisey, executive]

Yes. So in the single-family rental business, right, those tend to be larger transactions. So there was a big bulk order that came in.

[Operator]

[Operator Instructions] We will take our next question from John Campbell with Stephens Inc.

[John Campbell, analyst]

Fred, back to your commentary around the normalized 5 million market, in the past, I think you've talked to like a 10% margin target with that type of backdrop. I'm hoping you can maybe revisit that target. And also, if you could clarify if that 10% target is on a GAAP basis or adjusted with the add-back of purchase amortization?

[Frederick Eppinger, executive]

Yes. So again, it's about 11.5%, I think, John, now. I talked about, particularly probably the last 4 or 5 quarters, we've implemented some interesting things on data management and centralization of some of our search stuff. So we're now -- in my view, that number at a normal market is probably 11.5% or so. And I think about that all in GAAP, okay? Because again, it just -- it's kind of leveraging the investments we've made across the entire company and the ability to kind of grow share and the efficiency of our overall operating model gets us there. So I've talked about it as a total.

And so again, it's -- and one of the interesting things, like I think you think -- look at the last 9 months as a company, we've grown in a market that's flat to down in general, right, particularly in existing home sales has gone down for 37 months. But in a down market, we've grown revenue 9%, but our margin has increased 14% and our earnings have increased about 24%. So you can see the leverage of us growing share and how it helps there's a lot of leverage in the system. And what's particularly interesting about that leverage is that if the purchase market grows, it helps us the most because that's where we have the most fixed cost. That's where we have our direct operations with our multiple -- lots and lots and lots of locations, lots of distribution. And so that's even more levered to growth for us.

And so I still believe that's a good number. And I do believe that as we grow, we can manage our margins. But it is -- the geography of the growth helps a lot, right? If the geography is kind of in the place where you have higher fixed cost, the direct, it's a little bit better. But it's pretty much good everywhere. Because if you look at our numbers in the last 9 months, we've kind of held serve a little bit in direct. And the rest of the growth has come from agency and commercial and services. And we still see leverage in the margin enhancement. So I feel good about those kind of guidance that I've given in the past. I hope that's helpful.

[John Campbell, analyst]

Yes, very helpful. And then I saw an update from Redfin this morning, they're saying that their pending home sales rose about 3.5% over the last 4-week period year-over-year. That was a little surprising to us, just given the recent spike in rates. I'm just curious what you guys are seeing on both purchase and refi. Are you seeing any kind of notable response from consumers as rates tick higher?

[Frederick Eppinger, executive]

Yes, so it's a great question. So we saw it, too, right? So -- but the question is the different between pending and closing is kind of a mystery during this kind of market, right? So we've seen a lot of cancellations with spiky rate. So I -- but that could be a help in the next -- that should translate into existing home sales in the next quarter being a little bit better.

To David's point, like it was all -- and you know this better than I do, the sentiment when they first changed rates, and actually a couple of weeks before that, the sentiment was quite good, and you could feel some of the activity. And then it kind of flipped on us about, I don't know, 3 weeks ago as the 10-year started going back up and interest rate went back. So you can see it in the refi. And we also saw a nice little pop in refi orders.

My question is if you haven't locked -- is that going to hold? Or if you haven't locked in a rate or whatever, are you going to see it back up again a little bit? So the way I would describe it is I feel like we're bouncing around off the bottom. And so we could see a little bit of help or could go the other way. I do think in commercial, and it's hard to know that until everybody reports, but I think what we're going to find for the first half of the quarter that there's going to be some growth in commercial. For us, we've grown a lot. But I just feel like this is -- we're going to see a more positive commercial environment for sure. And I think that's going to continue.

But it's a great question because there's a lot of moving pieces right now. And I kind of -- I just -- again, I wasn't surprised when we saw the existing homes be down, it was 4% and some change for this last month. Because it's kind of -- it had -- the sentiment was better than the activity, right, almost. But I saw that [indiscernible], too. And that's a hopeful sign.

[John Campbell, analyst]

Yes. That's a good point. And I've noticed on our purchase orders, the closing ratio is lower than average. So the cancellation rate, it seems like that's kind of embedded there. One more, if I could squeeze in, kind of back to Bose's question around the other orders, if I look at just your purchase orders, if I look at your two top competitors, I mean, you guys have been -- the last couple of months have been down double digits year-over-year on a kind of closed order per day basis. Your top competitors have been kind of flattish.

But on the other hand, on the other order side, you guys are putting up really good results. I don't know if there's a differential there or maybe there's a mix shift, where some of those might have been categorized as purchase orders in the past that are now falling into other. Maybe if you could provide a little bit more commentary there.

[Frederick Eppinger, executive]

Yes. I don't think so. But it's a great question because it's like -- the last -- particularly last kind of few months, there's been a little bit of a differentiation, particularly with one competitor, kind of [indiscernible]. And so I took that, it went back. The way we look at it is MSA-by-MSA. And so we actually track share at every one of our MSAs. And what I'm seeing is that we're holding serve against specific competitors and against the market in every market we're in. There's a little bit down in a couple and a little bit up in others. But we're holding serve. And so it's not translating into revenue differential.

So I don't -- I kind of -- I'm struggling a little bit. I don't know if what's recorded versus some of the different competitors is different or what. But I'm not really worried. Now we're not growing share in direct right now, given the nature of what's happening. Although we've started a bunch of organic initiatives around micro market expansions and commercial expansions, which are paying some dues. So I feel that, that's going to get even better before we do transactions. But I don't see share softness that is translated in orders. So it's a really good -- it's a great question.

Now what -- three things it could be, right, is we are much weaker in the West, where our geographies are, in the West. The other thing, could there be some -- we don't have as many high-end homes. Because as you know, the market is a different animal at the high end than at the low end. The low end is pretty slow. But there could be something in that. But I'm pretty confident that our shares hold in direct in that our trends aren't good in all the other businesses as far as big growth.

But again, it's one of those things you kind of go -- I see the same thing and I keep looking. Because if you go for 36 months, we were ahead of everybody for a lot of months in a row. It's been -- it's kind of unfolded in the last handful of months, where there's a little difference the other way. But again, I feel good about the share position and feel good about what we're doing.

[Operator]

And there are no further questions at this time. I'll turn the call to Fred for any closing remarks.

[Frederick Eppinger, executive]

Yes. I just want to thank everybody for their time this morning and their interest in Stewart. Thank you.

[Operator]

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.