First American diversifies but still trading at lowly multiples.

Parker Kennedy wants investors to view First American Corp. as more than a title insurer. It's been a tough sell.

Despite buying several dozen non-title companies in recent years, title insurance still accounts for 70 percent of First American's sales--the same as in 2000 when the housing market began to take off.

Kennedy, chairman and chief executive of Santa Ana-based First American, isn't complaining about revenue. First American is on track to hit $7.4 billion in sales this year, according to Thomson Financial, up 10 percent from 2004. But he's looking at next year, when analysts forecast First American's revenue and profit will dip as housing markets cool.

The company's stock price--$42 at recent check with a market value of nearly $4 billion--reflects the prospect of a housing downturn. That's frustrating for Kennedy, who thinks Wall Street should allow for a premium given First American's other real estate services.

Title insurance is a mature business and expansion often requires stealing customers from competitors. "We are all beating each other up all day long," said Kennedy, who two years ago succeeded his father Donald Kennedy as chairman.

The business rises and falls with the housing market, and while First American is less of a cyclical company today than a decade ago, it's still at risk if mortgage rates spike and home buying and refinancing plunge. Kennedy's goal is to have title insurance account for 50 percent of sales.

Moving beyond titles

First American, founded in 1889 as Orange County Title, stepped up its diversification into financial data businesses in the late 1990s. The company accumulates data and sells access to lenders, real estate agents and appraisers.

The company scans documents, inputs digital and aerial photos and collects other data on buildings in 2,000 of the nation's 3,000 counties. "They have the largest real estate database in the country," said Geoffrey Dunn, an analyst with Keefe Bruyette & Woods in New York.

Data and services related to real estate make up the fastest-growing and most profitable portion of First American's businesses. And the data hoard goes beyond real estate: First American provides credit histories in partnership with Costa Mesa-based Experian Group.

"What we really are is a data company," Kennedy said. "We sell more data at First American than any other company in the U.S."

Yet after years of diversification, First American still is seen mainly as a title insurer. The company's shares trade at 10 times the company's expected 2006 earnings per share. Competitor Fidelity National Financial Inc. in Jacksonville, Fla., is trading at an identical earnings multiple. Equifax Inc., which gathers and sells financial and credit data, is more richly valued at a multiple of 17 times earnings.

But Kennedy may have hit on a way to get more respect from Wall Street. He's consolidated information not related to real estate transactions into St. Petersburg, Fla.-based First Advantage Corp. Last month First American sold its credit information group to First Advantage for $600 million in stock, upping its stake in First Advantage from 67 percent to 80 percent.

First Advantage took over First American's mortgage, automotive, consumer and subprime credit businesses. The structure is designed to get investors to separately value the two businesses: real estate information and services on the one hand and financial services and information on the other.

The company was formed a couple of years ago when First American combined one of its units with US Search.com Inc. and spun off the combined company. First Advantage provides employment screening, property management software, motor vehicle records and other services.

The strategy of flushing out non-title businesses also is being adopted by Fidelity National Financial, the nation's largest title insurer. Regulators earlier this month approved Fidelity's acquisition of St. Petersburg, Fla.-based Certegy Inc., which processes credit and debit card transactions, among other services. Fidelity plans to combine its mortgage-processing unit with Certegy.

First American and some other title insurers faced a wave of bad publicity this year from a revenue-sharing relationship with homebuilders and Realtors. Officials in some states have said that the profit sharing was illegal and hurt consumers who had to pay more for title insurance.

Three title insurers, including First American, agreed in July to pay $37.8 million to settle charges brought by California Insurance Commissioner John Garamendi. Garamendi said the title insurers cost homebuyers about $25 million because of the kickbacks. Buyers were reimbursed as part of the settlement, with First American paying $15 million in refunds and $5 million in penalties.

Looking ahead, Kennedy said the company is prepared if the housing market dips as mortgage rates rise. The title business stands to take a hit, he said. "It's a fairly people-intensive business," Kennedy said. "When the market drops we have to adjust expenses and it is disruptive."