No wonder Home Capital Group Inc.'s share price has been walloped: The Canadian company specializes in “subprime” mortgages – a dirty word, thanks to the implosion of the market in the United States, even though the company wisely avoids using it.
The shares rose above $40 as recently as last May, but touched a low of just $14.30 in November, a 65 per cent slide that followed concerns about the health of the housing market, not to mention financial firms. The weird part? No only is Home Capital still profitable, its earnings have continued to rise to record highs – a point not lost on Marc Charbin, an analyst at Jennings Capital.
He initiated coverage on the stock with a “buy” recommendation and a 12-month target price of $30. The shares traded on Friday at $23.62, up $1.19.
“Despite the significant deterioration in economic indicators such as housing starts, home sales, housing inventory, price appreciation, etc., there has not been a year in which residential mortgage credit has declined since 1969 (the earliest period in which data is available), including three recessionary periods,” Mr. Charbin said in a note.
At the same time, he pointed out that competitors, including GE Money and MoneyConnect Home Lending, have exited the market, while the Big Banks continue to avoid the subprime (er, “nonprime”) space.
Yes, Home Capital's impairment rates, driven by failed loans, will increase in the terrible economy, but the company's high concentration in residential loans – which are considered far safer than commercial and international lending – should insulate it from a spike in write-offs.
“Despite the fact that Home Capital is a nonprime lender, its impairment rates have been tracking those of the diversified banks, and its risk profile has improved significantly since the early 1990s,” Mr. Charbin said. “Our estimates and consensus estimates imply Home Capital's earnings will grow in 2009, a characteristic that is pervasively lacking in the financial sector.”
