market folly

We're posting up notes from the Capitalize For Kids conference 2016.  Next up is Jeff Smith of activist firm Starboard Value who pitched long Stewart Information (STC).


Jeff Smith's Presentation at Capitalize For Kids Conference 2016

•    LONG Stewart Information Services (STC).  Leading title insurance company, providing title insurance of home owners for both residential (90% of business) and commercial (10% of business)

•    $1 billion market cap, trades at 15x earnings

•    Title insurance is generally required by mortgage underwriter for buying a house and an refi. Needed for buyers’ safety to make sure no outstanding loans on the company.

•    Different than typical insurance business. Most traditional insurance business insure customers of losses for something they are trying to predict. Title insurance does not predict but essentially performs due diligence and therefore less risky, lower losses.

•    Very strong network build over many decades, with 12% market share. STC is one of the four clear leaders in this market.

•    Approximately 50% of sales are sold through direct (utilize own employees, higher margin business) and the remaining is agency business.

•    Opportunity for Starboard is: STC is currently underearning, pre-tax margins are 5% vs. industry peers of 11%. Believes margins can reach its peers based on additional cost cutting initiatives.

•    Since GFC, believes mortgage industry is less susceptible to fraud. Loss rates for title insurers has come down since 2009.

•    Balance Sheet is very strong (strongest relative to peers) and can return capital to shareholders •    Believes the company trades at a discount to peers due to years of underperformance, historical governance issues and no sell-side attention.

•    Recently dual class structure has been removed. •    Currently, Starboard has influenced the board and is adding two members (already made one change by placing the Steward CEO on the board).


Be sure to check out the rest of the presentations from Capitalize For Kids/Sohn Canada Conference.