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.

 

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.

Home Capital Group - 2013 First Quarter Update

Amid a weakening housing market, Home Capital Group recently reported adjusted EPS that grew 19.1% in the first quarter of 2013.  Over the same time frame, Canadian home sales fell 15% year over year, though prices have increased modestly.  Despite the doom-and-gloom predictions in the media, HCG sees a fairly balanced relationship between supply and demand, however.  Sales trends have improved in the early second quarter, and new listings have increased as well, while prices have remained fairly flat.  Overall, management sees no bubble in Canada's housing market.  

The company's return on equity remained high at 24%, though that figure has been falling somewhat in recent quarters.  Still, it stands at about twice the level of the average North American business, and the company is able to redeploy the vast majority of its earnings at that level.  In addition, non-performing loans remained low, despite the usual upward blip in the first quarter, due to customers that tend to be recovering from Christmas expenses and seasonal layoffs.  Since customers’ average Beacon score is improving, this trend is likely to continue.  CEO Gerald Soloway reaffirmed full-year 2013 guidance, and pledged that if he ever doubted Home Capital Group's ability to deliver on it, he would say so.

Mr. Market, however, isn't impressed.  In fact, HCG's stock has swooned by more than 15% from its recent peak, with much of that fall occurring over only a few recent trading days.  Several prominent investors are short the stock - a remarkable 23% Home's shares outstanding were held by short sellers as of May 14 - mostly as a macroeconomic bet that Canada's housing market is overvalued.  While it’s likely that home prices are overvalued by 10%-15%, it’s unlikely that Canada will see a US-style crash.  After all, 70% of Canada's aggregate home value is equity, a significant proportion of home owners have fixed rate mortgages, the jobs market has grown slowly but steadily since 2009, and regulators have taken responsible measures to prevent excess.  

Even if Canada's housing market falls harder than expected, it's unlikely that Home Capital Group would suffer adverse consequences.  The company has a long history of careful lending, and has avoided risky areas of Canada's mortgage market, such as condominiums and high-priced neighborhoods.  As a further safety net, HCG insists on meaningful down payments, and its borrowers tend to have significant equity in their homes.

Assuming growth at the low end of its guidance – the company has given a range of 13%-18% for the year - Home Capital Group is currently trading at just 7 times 2013 earnings.  There's no guarantee that the stock can't fall further, but investors should keep in mind both of Ben Graham's two most important ideas.  First, the aforementioned Mr. Market is there to serve patient investors, not to frighten them.  Second, the lower the price of a stock, the higher the margin of safety - which offers both downside protection, and upside opportunity.

My original investment analysis of Home Capital Group is here.

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.

A Summary of the IMF's Survey of Canada's Economy and Housing Market

The International Monetary Fund recently released an economic report on Canada that included an analysis of Canada's housing market.  Based on a detailed study that included immigration trends, household income, mortgage rates, and the rental market, the IMF concludes that Canada's housing market is overvalued by 10-15% (as of the third quarter of 2012).  While the report suggests that there has been some overbuilding, it concludes that excess supply remains modest.  

Overall, the authors do not express any particular alarm.  While they cite downside risks, their "baseline" scenario is a "soft landing," where nominal house prices are flat, or down slightly, over the next few years, with inflation slowly closing the gap between price and value.  While reduced housing starts and softening prices will drag on economic growth, it will not dramatically reduce expansion.  The (mostly) responsible lending practices and homeowners' significant equity mean that it's unlikely Canada will suffer from a US-style housing crash, the report concludes.

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.