Founded in 1889, First American Financial is a leading provider of title insurance and settlement services. The core title insurance business drives the majority of the company’s profits, providing essential policies in both the residential and commercial markets. Additionally, the company offers title plant management services, home warranty products, property and casualty insurance as well as trust and investment advisory services. With nearly 30% market share, the company has a distinct scale advantage in its network of offices and agencies and is poised to benefit from a housing market recovery. Yet investors remain fixated on the rearview mirror, paralyzed by the worst housing downturn in recent history.

Green Shoots Amidst the Wreckage
There is no denying that the recent housing downturn was severe. Mortgage originations plummeted, foreclosures spiked and refinancings remained elusive for all but for the most credit-worthy borrowers. In 2011, mortgage originations totaled just under $1.3 trillion, the lowest level in over a decade. Despite this reality, First American continues to weather the storm and remain profitable. Its high margin commercial business is thriving. Record low interest rates are driving periodic boosts in refinancing demand. More importantly, for the first time in a long while, the residential housing market is finally beginning to see some signs of stability.

A Lean, Mean, Centralized Machine
What investors are missing in this story is that once the residential housing market finally turns, First American is poised to emerge as a leaner, more efficient industry leader. Over the past few years, management has taken dramatic steps to enact permanent cost cuts to the tune of over $1 billion in annual savings. Claims centers have been reduced from 100 to 5. Accounting centers have been consolidated from 30 to just 3. And, regional managers have been cut from 16 to 3. Long gone are the days when every policy required onsite courthouse visits to inspect title. The new world in title insurance revolves around electronic data, automation and centralization and no one is better positioned than First American. Investors may worry that housing sales will never return to its peak levels, thus jeopardizing the future profitability of the company. But we take comfort that peak volumes are not necessary. In fact, with its cost-saving measures now implemented, First American can achieve prior peak operating margins on just half the number of real estate transactions required previously.

A Credit to Management
CEO Dennis Gilmore deserves credit for both the company’s success during the downturn as well as its current industry position. While competitors chose to either shift away from the title business or make short term staff reductions, Gilmore had the foresight to seize a rare opportunity to completely reshape the business. The company has over a $1.50 per share in excess cash, an efficient cost structure and a strong commercial business–all of which should help drive earnings per share this year to over $1.00.

A Long Term View
As long term investors, we believe the current housing market has created a tremendous opportunity to buy this rare diamond in the rough at a bargain price.

Held in Ariel Fund, Ariel Appreciation Fund and Ariel Discovery Fund, First American Financial’s shares traded at $16.63 as of March 31, 2012, a 34% discount to our private market value of $25.21.

First American Financial Corp. (NYSE: FAF)
1 First American Way
Santa Ana, CA 92707
800-854-3643
firstam.com

Snap-on is a leading manufacturer of tools and equipment as well as a provider of diagnostics, repair information and systems solutions for independent car repair centers. The company was founded in 1920 when Joseph Johnson and William Seidemann came up with the original idea of interchangeable sockets and wrench handles. The innovative spirit that characterized the company’s early beginnings along with a passion for producing high-quality products has led to the company’s dominant market position.

Franchisee Model
Snap-on uses a franchise structure in the sale and distribution of its products to vehicle repair centers. These franchisees carry their inventory in 4,800 customized vans and make weekly visits to customers and prospects. The vans usually sell products directly to the mechanics. The frequent interaction between the franchisee and mechanics has proven helpful in understanding their customers’ needs. Snap-on’s regular give-and-take with customers gives it an edge over other toolmakers.

Demand for New Tools
Demand for Snap-on tools is expected to grow due to multiple tailwinds. First, the company’s primary customers are independent automotive shops, which continue to gain share versus auto dealerships. This gain is the result of two major factors—an aging car fleet and higher labor costs per hour at dealerships. Older cars need more repairs after warranties expire, and the cheaper labor costs of independent shops have proven to be a solid alternative to returning to the dealer for the work. This trend should continue in the near term. Also, because independent shops work on a variety of vehicle brands, they often require multiple sets of tools. Finally, innovation in newer models can increase demand for new tools.

Financial Services Segment
In 2009, Snap-on ended its agreement with CIT Group to fund the assets of Snap-on Credit, a business that provides a broad range of financial services to the company’s franchisees and customers. Integrating the financial services business has created “lumpiness” in the company’s earnings, but this should stabilize once the transition is completed. We expect this segment to improve its profitability over the next few quarters and demonstrate the earnings power of the business.

Intriguing Valuation
The market is valuing the company as if it will no longer benefit from the aforementioned growth trends. Additionally, we believe the current market valuation reflects low expectations from the company’s financial services business. Overall, Snap-on stock is positioned to provide significant upside from current levels in the long run.

Held in Ariel Focus Fund, Snap-on’s shares traded at $60.97 as of March 31, 2012, a 32% discount to our steadily growing private market value of $89.16.

Snap-on Inc. (NYSE: SNA)
P.O. Box 1410
Kenosha, WI  53141
262-656-5200
snapon.com

Symmetry Medical Inc. is a leading global source of innovative medical device solutions. The company supplies high-precision surgical instruments that focus on orthopedic applications like knee and hip reconstruction procedures. Symmetry also delivers a full line of cases and trays that are used in more than 25 different medical markets ranging from the orthopedics to the dental to the cardiovascular fields. The surgical instruments are typically combined into a case that is compatible with the specialized-sterilization procedures required between surgeries. Finally, the company has the ability to fully manufacture orthopedic implants from start to finish.

Growth in the Current Healthcare Cost Environment
We believe innovative, well-managed organizations can still thrive in this cost-conscious healthcare environment. First, Symmetry’s core products will benefit from the growth in orthopedic procedures due to aging global demographics. Second, the company directly benefits from new product launches by its core orthopedic partners. We believe innovative products that improve surgical outcomes, speed recovery times and decrease the probability of infection will continue to be highly desired. Third, as the restraints on healthcare costs impact medical device suppliers, they are re-engineering their business processes to focus on costs. One way to lower costs is to reduce the number of vendors manufacturing the company’s products, which results in more favorable pricing. At the same time, quality control cannot be sacrificed since recalls can be extremely costly. But Symmetry will benefit from vendor rationalization without jeopardizing its reputation for quality due to a strong track-record that is envied by its competitors. Finally, the company has a state-of-the-art facility in Malaysia that serves as a platform for expansion into overseas markets that are investing in better healthcare systems.

I Wish I Had It Done Sooner
Over the last three years, Symmetry has been under a cloud due to weak patient volume. The soft market is a consequence of higher insurance deductibles, higher co-payments and concerns about sick-time required for recuperation from surgery. Patients have not been willing to take extended sick-time for fear of losing their jobs in this high unemployment environment. We believe, as the economy continues to stabilize, those who have delayed orthopedic surgeries will return to the patient pool. In addition, as the economy recovers and unemployment declines, orthopedic surgery volumes should normalize. Although these procedures are considered elective, they are highly desired by the patient who wants to maintain an active lifestyle. After undergoing a hip or knee reconstruction procedure, doctors and family-members often hear “I wish I had it done sooner.”

On The Right Track
Symmetry Medical is under the new leadership of Tom Sullivan. Having joined the company in 2011, Sullivan brings a wealth of industry knowledge from his prior days at Johnson & Johnson. His previous roles enable him to understand what Symmetry’s customers need to navigate a changing healthcare environment. Under his leadership, we believe the company is focused on expanding its geographic footprint and product line. The company recently acquired an instrumentation business from Johnson & Johnson which added complimentary products to its portfolio. Although the company added debt to complete the acquisition, we remain confident management is laser-focused on right-sizing the balance sheet over the near-term. We believe the company is positioned for solid growth as the U.S. economy rebounds and the financial dynamics of the company improve.

Held in Ariel Fund and Ariel Discovery Fund, Symmetry Medical’s shares traded at $7.07 as of March 31, 2012, a 54% discount to our PMV of $15.23.

Symmetry Medical Inc. (NYSE: SMA)
3724 North State Road 15
Warsaw, IN 46582
574-268-2252
symmetrymedical.com