Home Capital Group - 2012 Fourth Quarter Update

Home Capital Group posted a strong fourth quarter, to cap off yet another strong year.  Earnings per share were $1.70 for the quarter, up 17.2% from the prior year period.  For 2012, earnings were $6.40, 16.8% higher than in 2011.  Just as important, return on equity remained high, at 25.5% for the year.  With HCG, growth never comes at the cost of a weakened balance sheet or significant risks.  Indeed, its tier one capital ratio stands at a formidable 17.01%, and the total capital ratio stands at 20.68%.  Non-performing loans amounted to just 0.33% of gross loans, a superb figure.  In addition, Home Capital Group increased its savings and fixed-term deposits, which are cheap, safe forms of funding.

The company has a long and commendable record of delivering on its promises, and this year was no different.  Shareholders ought to be excited about the year to come, too: the company is forecasting earnings growth of 13-18% in 2013, and return on equity exceeding 20%.  Importantly, these expectations are not based on starry-eyed assumptions about the Canadian economy or housing market.  Management foresees slow but steady economic growth, and a moderate decline in housing starts, resales and prices.  While it remains early, the first six weeks of the year were strong, management noted on the conference call.

The mid-point of the 2013 EPS estimate is about $7.35, meaning that even after a 20% or so increase in the stock over the past year, Home Capital Group currently trades at just 8x earnings.  This offers a large margin of safety on the downside, and a tremendous opportunity on the upside.  The dividend now stands at $1.04 per year, offering a 1.7% yield, slightly less than the market average, though there's a good chance it will rise before the year concludes.

Disclosure: At the time this article was published, the writer was long HCG stock

My investment analysis of Home Capital Group is here.

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