HOME CAPITAL GROUP INC. $48(Toronto symbol HCG; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 34.7 million; Market cap; $1.7 billion; Price-to-sales ratio: 2.2; Dividend yield: 1.8%; TSINetwork Rating: Average; www.homecapital.com) is a mortgage lender that serves borrowers who don’t meet the stricter standards of larger, traditional lenders, like banks.
Even though Home Capital caters to riskier borrowers, it avoids huge credit losses by identifying problem loans early. It then uses this information to restructure a borrower’s repayment terms and adjust its lending policies.
In the three months ended June 30, 2012, Home Capital’s earnings rose 10.4%, to $53.2 million, or $1.54 a share. That’s despite a higher corporate tax rate in Ontario, which cut Home Capital’s earnings by $2.0 million. A year earlier, the company earned $48.2 million, or $1.38 a share.
Low interest rates and rising real estate values continue to fuel demand for mortgages and other loans. That pushed up Home Capital’s revenue by 10.2%, to $218.8 million from $198.6 million.
Home Capital set aside $2.3 million to cover future loan losses in the latest quarter, up 88.8% from $1.2 million a year earlier.
However, that’s mainly because the company is shifting toward more profitable traditional mortgages that are not insured by the Canada Mortgage and Housing Corporation. Even after this jump, bad loans still account for just 0.31% of its total loans.
Fears of a drop in real estate values, which could lead to higher credit losses, have held back the stock in the past few months. However, Canada’s employment levels are stable, and interest rates remain low. That should help support housing prices.
Home Capital will probably earn $6.28 a share in 2012. The stock trades at just 7.6 times that figure. The $0.88 dividend yields 1.8%.
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