HOME CAPITAL GROUP INC. $25 (Toronto symbol HCG; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 34.4 million; Market cap: $860 million; Price-to-sales ratio: 1.9; SI Rating: Average) is the parent company of Home Trust Company, a federally regulated firm that specializes in residential first mortgages and credit cards for borrowers who don’t meet the criteria of traditional lenders.
The credit crisis and Home Capital’s reliance on less-creditworthy customers caused the stock to drop from $41 last May to $14 in November. However, Home Capital is safer than it appears. Its stringent screening process eliminates most of the problem borrowers. Still, 0.86% of Home Capital’s loans were in default in 2008. This is up from 0.72% the previous year.
Despite the volatile economy, Home Capital’s 2008 earnings rose 20.4%, to $108.7 million, or $3.13 a share. It earned $90.2 million, or $2.59 a share, in 2007. Revenue rose 23.3% in 2008, to $454.7 million from $368.9 million in 2007.
Most of this growth was because the federal government bought up more residential mortgage loans. This let lenders like Home Capital issue more mortgages without taking on much risk. A 31% jump in fee income from new mortgages and Visa credit cards also contributed to the higher revenue and earnings.
The company has no controlling shareholder. Because of the recent weakness in its share price, Home Capital’s management wants shareholders to approve a shareholder-rights plan at the annual meeting in May. Plans like this often thwart hostile takeover bids, and give management added job security. However, if adopted, this plan shouldn’t stop you from investing in a well-managed company like Home Capital.
Home Capital’s 2009 earnings should increase to $3.41 a share, and the stock trades at 7.3 times that figure. The $0.52 dividend yields 2.1%.
Home Capital Group is a buy.
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