Saturday, 3 August 2013

Home Capital Group - 2013 Second Quarter Update

Home Capital Group recently reported yet another strong quarter.  In the second quarter, adjusted EPS increased 15.6% from a year ago, and first half results were higher by 16.9%.  At 23.6%, return on equity remained high.  These stellar numbers weren't the result of deteriorating credit quality, however: non-performing loans were just 0.31%.  In addition, Tier 1 and total capital ratios remained very high.  As a result, Home Capital Group was able to increase its quarterly dividend from $0.26 to 0.28, an 8% improvement.

The company predicted good times to come, as well.  In Q2 and in July, demand increased for all of HCG’s products.  Fortunately, none of the prominent disasters – acts of god and of man – will materially affect the firm.  The company's loans in Quebec are only advanced in the major centers, so the train that exploded didn't damage any of its customers' property; there was little lasting damage from floods in Toronto; and few, if any, houses in Alberta were abandoned, despite heavy damage to household items (in total, about 20 people asked for a one month deferment on mortgage payments).  Home Capital Group won’t even have to set aside any additional reserves due to the calamities.
On its conference call, management addressed the short position that was initiated on HCG’s stock in May, largely as macroeconomic bet against Canadian housing.  Over many years, shorts sellers have held an average of 800 000 shares (out of 45 million), but the total recently jumped sharply to 5.5 million.  The CEO expressed hope that it was the firm's solid fundamentals that has pushed up the stock in recent weeks, but suggested that the wild rise in volume over the past few days may have been short-sellers covering their positions before month end (management cautioned that they merely have anecdotal evidence that the increase in volume is the result of a short squeeze; their theory is not based on the more solid stuff of regulatory filings).  In any case, the stock is now at an all-time high.
CEO Gerald Soloway is one of Canada's finest executives, but he is now well into his seventies, leaving investors to wonder how long he'll lead Home Capital Group.  In response to that very question from a private investor - it's not surprising that this all-important question was posed not by a near-sighted analyst, but by a far-seeing shareholder of the business - Soloway said that he'll “probably be around a few more years.”  In fact, he noted that his mother is still in good health at 98, leaving greedy stockholders to hope for more than just a few more years from the genetically fortunate chief executive.  If not, he also shed light on what will happen when he's gone: President Martin Reid will become CEO.  Indeed, he is already deeply familiar with all aspects of the company, in case he's required to step in on short notice. 

Overall, the company logged another fine quarter, and is very likely to do well in the near - and in the more distant - future.
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