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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Potash Corp - 2013 Second Quarter Update

Potash Corp's second quarter was somewhat weak, and the softness is expected to continue for the remainder of 2013.  Indeed, EPS fell from $0.99 (as adjusted) to $0.72 in the quarter, and full-year guidance was lowered to $2.45-2.70 from $2.75-3.25.  However, some perspective is in order: even at the low end of that range, the company's return on equity will still be around 20% for the year, despite steadily growing assets, as its capital expansion continues, and moderate amounts of debt (an immoderate amount of debt reduces equity, and artificially boosts ROE).

At about 56 million tonnes, global shipments of potash are expected to be in line with last year.  However, because it's requiring a lower price to keep volumes steady, it cannot be denied that the market has weakened since last year.  Realized potash prices fell significantly in the quarter, from $433 to $356, an 18% drop.  Nitrogen and phosphate prices fell, as well.  Also contributing to the weak second half forecast is the lack of a potash contract with China, which will stall sales in the third quarter, though CEO Bill Doyle predicts an agreement will be forged before the fourth quarter.  In addition, currency headwinds are affecting results: a weaker rupee is part of the reason Indian demand has been soft (the major cause remains a domestic subsidy that punishes potash purchases relative to nitrogen), just as a weaker real has offset some of the strength in Brazil.  In the latter case, because Brazil is a major exporter, the economics roughly balance out, since a weaker real means higher US dollar prices for goods sold.

While the softness in the potash market has lingered longer than many investors and analysts had expected - and may persist for the short or even medium-term - the industry's long-term strength remains intact.  People must eat.  In fact, the latest estimate of how many people are going to be eating in the decades to come was recently revised upward, from 10 billion, to a staggering 11 billion, by 2050.  While eventually there will be greenfield supply to meet growing demand, little is likely to come on-stream over the next decade.

Potash Corp shares trade for under $40, but the company's stock market investments are worth $8 per share.  Even after adding back a little over $3 per share in debt (net of cash), the "all in" cost of a POT share is $34-35.  This means that Potash Corp shares are trading at just 13-14 times 2013 earnings, using the mid-point of the newly announced guidance.  Happily for shareholders, management announced a $2 billion share repurchase that will retire up to 5% of shares outstanding over the next year.  This may be increased next year, management noted, as capital expenditures fall, and the already significant dividend could be upped, too.  Investors may want to follow the company’s lead and buy some Potash Corp stock at today’s low prices.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.