First National Financial Faces Structural Challenges as Q1 Miss Triggers Target Cut to $39

First National Financial Corp (TSX:FN) entered earnings season with a cloud of uncertainty after analysts at National Bank Financial slashed its target price to $39 following a significant first-quarter earnings miss. The downgrade, driven by underperformance in key revenue streams, highlights growing concerns about the company’s ability to navigate structural headwinds in its core businesses.

The Q1 Miss: A Closer Look at the Numbers

Analysts had anticipated Q1 2025 revenue of $204 million and EPS of $0.79, but First National fell short, with its EPS missing estimates by a staggering 17%. The underperformance stemmed from two critical areas: Servicing Income and Securitization Income, which together account for a substantial portion of the company’s earnings.

Servicing Income declined due to lower third-party underwriting fees, signaling potential softness in demand or increased competition. Meanwhile, Securitization Income suffered as the company shifted its portfolio toward mortgages originated during the 2022–2023 period of rapid interest rate hikes. These older mortgages, which now carry narrower spreads due to falling rates, are generating less profit than newer loans.

Analyst Downgrade and Revised Forecasts

National Bank analyst Jaeme Gloyn responded by lowering his price target for FN to $39 from $43, maintaining a “sector perform” rating. His revised estimates now project 2025 EPS of $3.38—a 19% drop from prior forecasts of $4.16—and 2026 EPS of $4.11, down 12% from $4.65. Gloyn emphasized that the structural issues in Servicing and Securitization income are not temporary; they reflect a fundamental shift in market dynamics that could persist through 2025.

Context: A Strong Q4, But a Rocky Start to 2025

The contrast between Q4 2024 and Q1 2025 is stark. In Q4, First National delivered a robust beat, with revenue surging 5.3% to $240 million and EPS jumping 11.8% to $1.04, driving a 1.05% stock price rise. However, the Q1 miss has erased some of that optimism. The stock currently trades at $40.46, below the revised $39 target, suggesting investors are pricing in further near-term uncertainty.

Valuation and Contrarian Perspectives

While the consensus target has dropped, GuruFocus estimates a one-year “fair value” of $64.92—a 60% premium to current levels—based on metrics like discounted cash flow and asset valuation. This divergence suggests a potential disconnect between short-term operational challenges and the company’s long-term asset base.

However, the broader analyst community remains cautious. The average 12-month target of $43.40 implies only a 7.27% upside, and the consensus “Hold” rating reflects skepticism about near-term profitability.

Conclusion: Navigating Headwinds with Caution

First National Financial’s Q1 miss underscores the vulnerability of its business model to structural shifts in the mortgage market. The 17% EPS shortfall, driven by legacy portfolios and margin compression, raises questions about its ability to stabilize earnings in 2025. With Gloyn’s revised estimates pointing to a 19% drop in annual EPS, investors must weigh whether the current valuation reflects these risks.

Despite the near-term headwinds, the stock’s $64.92 GuruFocus valuation hints at longer-term potential if the company can pivot its Securitization strategy or expand its servicing revenue. For now, though, the path to recovery remains uncertain, and the lowered target to $39 reflects a prudent, albeit cautious, outlook. Investors seeking exposure to Canada’s mortgage-backed securities market may want to wait for clearer signs of stabilization before committing capital.

In short, First National Financial’s story is one of resilience against structural challenges—a balancing act between legacy portfolios and future growth. Until those structural issues are resolved, the stock is likely to remain under pressure, even if its asset base holds long-term value.