Editor's note: An earlier version of this story incorrectly identified Mr. Hudson as the founder of Element Financial. This has been corrected.
Steven Hudson’s latest venture is dull – and investors seem to like that just fine.
Shares in Element Financial Corp. have more than doubled in the past year as investors count on Mr. Hudson and his team to produce profits by leasing out helicopters, rail cars, buses and other equipment to its customers.
On Tuesday, the stock gained as much as 3 per cent after the Toronto-based equipment financing company confirmed two deals as well as a plan to raise $1-billion in capital.
Element, which makes its profit off the lease agreements and fees such as maintenance, was built on the premise that banks have become less interested in the smaller-scale equipment leasing business in the wake of the 2008 financial crisis. Mr. Hudson’s company aims to fill that gap, based on his experience in building one of the world’s largest non-bank financing companies.
“We are still seeing strong demand as the North American economy re-equips itself … We are a beneficiary of that,” Mr. Hudson, Element’s chief executive, said in an interview.
Element is a much smaller venture than his former company, Newcourt Credit Group Inc., which grew into a lender with $36-billion in assets spread across 12 sectors in 26 countries before it was sold in 1999. The sale was bittersweet, closing at $2.4-billion or nearly half of its original price, after Newcourt lost money selling repackaged loans as securities during a downturn in that market.
Mr. Hudson went on to invest in and run Hair Club for Men, followed by weight-loss chain Herbal Magic, before partnering with Element founder Stephen Sands in 2010. Mr. Hudson was named Element CEO in 2011.
Element is a “boring” company on purpose, said Mr. Hudson. It has just five lines of business in two countries and assets of about $3-billion, up from $400-million two years ago, following a string of acquisitions.
“We have the benefit of knowing what works and what doesn’t from our Newcourt days,” he said. “There is nothing glamorous here.”
Investors appear to like its utilitarian focus. Element stock is up about 250 per cent since it went public two years ago this week at $4.20 per share. It hit its recent peak of $14.84 last week, which is double from where it began the year.
All eight analysts that cover the company have a “buy” or equivalent rating on the stock, according to Thomson Reuters I/B/E/S. “We continue to believe Element is a unique investment prospect and one of the few true growth stories left in the Canadian financials space,” Bank of Nova Scotia analyst Phil Hardie said in a note Tuesday, after raising his target price to $18.50 from $16 as a result of its latest announcements.
Element said late Monday that it has a deal with Trinity Industries to finance $2-billion worth of rail cars over the next two years and confirmed an arrangement with a GE Capital subsidiary to buy finance assets secured by helicopters for $245-million (U.S.). Element also plans to raise $1-billion through debt and equity offerings, both of which were bumped up in value on Tuesday.
Barclays Capital Inc. analyst John Aiken also raised his target price to $17 from $16 on the news, saying the rail-car deal will add scale and diversification and the equity raise will allow Element take on bigger financings in future.
“We believe that the announced deals are a relatively low risk method for growth,” Mr. Aiken said in a note. “As always for Element, execution will remain key to determining its ultimate success.”
Not everyone is convinced the company’s prospects are as bright as the share price would suggests. The stocks is trading at about 22 times next-year’s earnings, which is double that of many of the Canadian banks and mortgage companies and other non-bank lenders such as CIT Group Inc.
“I am not comfortable with this type of business or valuation,” said Barry Schwartz, portfolio manager at Baskin Financial Services. “There is a lot of optimism priced into this company.”
Peter Hodson, head of research at 5i Research Inc., an independent stock analysis firm, calls it “growth versus value” play. “If you’re a value investor you might shake your head at it, “ he said. “When you look at how fast they grow and how fast they move … you almost have to like it.”