HOME CAPITAL GROUP INC. $35 (Toronto symbol HCG; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 34.5 million; Market cap: $1.2 billion; SI Rating: Average) is the parent company of Home Trust Company, a federally regulated trust company. It provides financial services such as chequing accounts, mortgages and credit cards.
Home Capital is more risky than Great-West and IGM Financial. That’s because it focuses on customers that usually have trouble meeting the stricter lending requirements of larger banks. But we feel its strong growth prospects help offset this risk.
The company now aims to spur its growth by offering traditional mortgages. While that puts it in direct competition with the big banks, Home Capital feels this move will strengthen its position among mortgage brokers.
Meanwhile, the company continues to win new business away from competitors who have stopped making loans to riskier borrowers. In the three months ended June 30, 2008, earnings per share rose 20.6%, to $0.76 from $0.63 a year earlier. Mortgage loans rose 42.5%, while balances on its Equityline Visa credit cards grew 24.7%.
Despite targeting riskier borrowers than larger banks, Home Capital is doing a good job controlling credit losses. At June 30, 2008, bad loans represented just 0.71% of its total loan portfolio compared to 0.72% at the end of 2007.
The stock now trades at just 11.0 times its forecast 2008 earnings of $3.18 a share. The $0.52 dividend yields 1.5%.
Home Capital Group is a buy.
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