Pat McKeough responds to many requests from members of his Inner Circle for specific advice on the Canadian stock market and other investments as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week we offer you a report on one of the stocks profiled in these Q&A sessions. We give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of the specific buy, hold and sell advice we offer you in our daily posts. Every week you get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “Our Top U.S. Stocks” on Thursday.
Recently we received a question from an Inner Circle member about a Canadian firm that specializes in mortgages. First National Financial is the largest originator of mortgages outside the banks, with almost $80 billion under administration. Pat examines the strategies by which the company sells and securitizes its mortgages in order to free up capital and looks at the effect these strategies have on the company’s short- and long-term profit margins.
Q: Dear Pat: What are your thoughts on First National Financial Corp.? Thanks.
A: First National Financial Corp., (symbol FN on Toronto; www.firstnational.ca) is Canada’s largest non-bank mortgage originator and underwriter, with $79.9 billion of mortgages under administration.
The company mainly offers mortgages for single-family homes and apartment buildings. It also conducts some commercial lending.
To free up capital for further expansion, First National sells its mortgages to financial institutions, such as banks. It is also increasingly securitizing its mortgages, or packaging them together and selling them as mortgage bonds. However, in both cases, First National continues to manage the mortgages.
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Securitizing mortgages lowers short-term earnings but raises long-term profit margins
Mortgage servicing provides stable and recurring income and lets First National renew the mortgages itself. This is much more profitable than initial mortgage originations, because mortgage brokers don’t generally collect fees on renewing existing mortgages.
In the three months ended September 30, 2014, First National’s earnings fell 11.1%, to $0.56 from $0.63 a year earlier. That was also below the consensus estimate of $0.61.
Securitizing mortgages tends to lower earnings in the short term but has higher longer-term profit margins than selling individual mortgages to institutions. So while First National had strong originations in the latest quarter, it still reported lower earnings.
The stock trades at 10.9 times this year’s forecast earnings of $2.12 a share. It yields a high 6.5%.
We view First National Financial Corp. as a hold.
Monday we tell you why a Canadian surveillance systems firm has seen its shares decline.
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Pat McKeough responds to many requests from members of his Inner Circle for specific advice on the Canadian stock market and other investments as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week we offer you a report on one of the stocks profiled in these Q&A sessions. We give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of the specific buy, hold and sell advice we offer you in our daily posts. Every week you get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “Our Top U.S. Stocks” on Thursday.
