HOME CAPITAL GROUP INC (HCG.b, Toronto) This is an older Example Report and is now out of Date
RESEARCH SUMMARY
Report Author:	Shawn Allen, investorsfriend.com
Author's disclosure of share ownership:	I hold 350 shares  purchased as a result of this analysis
Based on financials from:	Dec. '01 Y.E. plus earnings for Q1 '02
Last updated:	29-Apr-02
Current Price:	$14.90
Currency:	Canadian $
Current Rating (Company Rating does not consider the circumstances of any individual investor and is therefore not a recommendation and is not Investment Advice):	This is an Example Report this stock was rated "Buy" on April 29, 2002. As of May 25, 2007 the stock has risen 436%! to $79.62 (Actually it was at $39.81 but the stock was split) This old Report is now out of Date and is provided as an example report Buy
Investment "quality" (speculative vs. investment grade):	Moderately Speculative
RATING: I Rate this a Buy based on good industry structure, good performance on Buffett's tenets and based on reasonable value ratios. (The stock is pricing in about 12% growth for 5 years which is significantly lower than historic). I expect the stock to plod ahead nicely and to likely offer a good return in the range of 12 to 20% in the next year. However, there is some risk that if bad loans materialize then the stock will fall at least temporarily. But overall, I rate it a Buy and recently purchased 350 shares which I intend to hold for the longer term. The company just today released q1 earnings which were up 47% on the year. I will consider adding to my position.
INSIDER TRADING: Some officers have exercised options and sold the shares. Not a huge amount. Recently a retiring board member and significant share holder is selling a one third of his shares into the market. Overall, this is not encouraging but may not be cause for alarm.
WARREN BUFFETT's TENETS: Seems to pass most of Buffett's tenets (see Robert Hagstrom's book) -  simple to understand (pass),good profit history (pass), favorable prospects for above average returns based on history and good industry structure (marginal pass), apparently candid ethical management (pass), high ROE (pass), high profits on sales (pass) , but not a low debt ratio (fail), little chance of permanent loss of capital (marginal pass) and arguably selling at a small discount to intrinsic value (marginal pass).
VALUE AND GROWTH RATIOS: Price to book value is not attractive at 3.5, Dividend yield is almost insignificant at 0.6%. P/E is moderately low, given the growth, at 14.9. Growth in revenue and earnings per share have been exceptional at over 20%. ROE has been exceptional at over 20% for four years.  I calculate an intrinsic value  based on the amount of growth that I am willing to pay for of $14.31 based on 12% growth and $20.23 based on 15% growth for five years. This results in a calculated Price to Value ratio of 104% to 74% respectively. Assuming that growth will be at least 12% per year for the next five years, these ratios indicate a Buy.
SUPPORTING RESEARCH AND ANALYSIS
Symbol and Exchange:	HCG.b, Toronto
Currency:	Canadian $
Category:	Growth
DESCRIPTION OF BUSINESS: A very small Trust company and Savings and Loan institution primarily serving customers that don't meet the lending criteria for the major banks.
Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, earnings growth trend and industry attractiveness. I undertake a relatively detailed  analysis of the published financial statements including growth per share trends and my general view of the industry attractiveness and the companies growth prospects. However my analysis is subject to limitations including the following examples. I do not attempt to interpret trends in the share price or volumes traded. I have not necessarily closely studied all of the detailed notes to the financial statements. I have not typically listened to the analyst conference calls. I have not met with management or discussed the long term earnings growth prospects with management. I am not typically able to access insider trade data. I have not reviewed all press releases. I typically have no special expertise or knowledge of the industry.
Contact:	sutherland@hometrust.ca <sutherland@hometrust.ca>
Web-site:	www.homecapital.com
INVESTMENT-PICKS'  ASSESSMENT HISTORY
Price when first featured:	$14.85
Date first featured:	26-Apr-02
Assessment when first featured:	Buy
Price increase since first featured:	0.3%
INCOME AND PRICE / EARNINGS RATIO ANALYSIS
Latest four quarters annual sales $ millions:	$96.5
Latest four quarters annual earnings $ millions:	$16.4
P/E ratio based on latest four quarters earnings:	14.9
Latest four quarters annual earnings, adjusted, $ millions:	$16.4
BASIS OR SOURCE OF ADJUSTED EARNINGS: Not Applicable, no adjustment was made
Quality of Earnings Measurement: Good. Financial institutions expense actual bad debt losses but also usually expense some extra money to set aside for any increase in bad debt losses, so this is conservative. The company has capitalized costs of setting up a credit card business and capitalizes fees paid to loan brokers. This is very legitimate but is more aggressive compared to immediately expensing those costs. On the other hand, income is realized in cash (not accruals) and there is very little amortization expense (which would be an estimate).  Overall earnings are measured reasonably conservatively.
P/E ratio based on latest four quarters earnings, adjusted	14.9
Latest fiscal year annual earnings:	$14.9
P/E ratio based on latest fiscal year earnings:	16.4
Fiscal earnings adjusted:	$14.9
P/E ratio for fiscal earnings adjusted:	16.4
Latest four quarters profit as percent of sales	17.0%
Dividend Yield:	0.6%
Price / Sales Ratio	2.52
BALANCE SHEET ITEMS
Price to book value ratio:	3.50
Quality of assets measurement: In many ways the asset measurement is very accurate and far superior to that of most industrial companies. The reason is that almost assets and liabilities are very liquid in nature. However, lending institutions operate on only a sliver of equity and there fore any small error in asset measurement (such as under-estimated bad debt reserves) could quickly wipe out a significant portion of the equity. For that reason, I would not consider the book value per share to be very reliable, although I have no reason to suspect that there is any problem. In any case the shares are trading well above book value and therefor the quality of assets provides little down-side protection in any event.
Number of common shares in millions:	17.7
Controlling Shareholder: The President and his associates own over 50% of the votes partly because some of their shares are (ugh!) multiple voting shares.
Market Capitalization $ millions:	$263.1
Percentage of assets supported by common equity: (remainder is debt or equivalent)	7%
Current assets / current liabilities:	0.0
Liquidity and capital structure: As a typical lending institution there is great liquidity but very little equity.
RETURN ON EQUITY AND ON MARKET VALUE
Latest four quarters adjusted net income return on ending equity:	21.8%
Latest fiscal year adjusted net income return on average equity:	20.3%
Adjusted Latest four quarters return on market capitalization:	6.2%
GROWTH RATIOS, OUTLOOK and CALCULATED INTRINSIC VALUE PER SHARE
4 years compounded growth in sales/share	22.9%
Volatility of sales growth per share:	Strong, steady growth
4 Years compounded growth in earnings/share	42.6%
4 years compounded growth in adjusted earnings per share	n.a.
Volatility of earnings growth:	Strong Steady growth
Projected current year earnings $millions:	not available
Projected price to earnings ratio:	not available
Over the last five years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in earnings per share?	Yes
Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained:	18.0%
Conservative estimate of compounded growth in earnings per share over next ten years:	12.0%
Optimistic estimate of compounded growth in earnings per share over next ten years:	15.0%
GROWTH OUTLOOK: I see no reason that the recent strong growth cannot continue.
Estimated present value per share: I calculate  $14.31 if adjusted earnings per share grow for 5 years at the more conservative rate of 12% per year and the shares are then sold at a P/E of 12 and $20.23 if earnings per share grow at the more optimistic rate of 15% per year for 5 years. and the shares are then sold at a P/E of 15.   Both estimates use a 9% required rate of return.
ADDITIONAL COMMENTS
GENERAL COMMENTS:
INDUSTRY ATTRACTIVENESS: (These comments reflect the industry rather than any particular company.) Michael Porter of Harvard argues that an attractive industry is one where firms are somewhat protected from competition.  The lending business has some barriers to entry in terms of strict government regulations. (pass). No issues with excessively powerful suppliers (pass). No issues with excessively powerful customers (pass?), No viable substitute products (pass), In my experience only a moderate tendency to compete on price, the product is a pure commodity, but with low fixed cost there in no incentive for the industry to compete excessively on price (marginal pass). Overall, it appears that the industry is at least somewhat attractive.
COMPETITIVE ADVANTAGE: I'm not aware of any real competitive advantages. The company has chosen to compete by focusing on a niche market underserved by the big banks. Therefore the company has some advantage in serving the niche market by tailoring its efforts to that market.
RECENT EVENTS: Recently a retiring board member and significant share holder is selling a one third of his shares into the market. Overall, this is not encouraging but may not be cause for alarm. The good news is that his multiple voting shares were converted to regular voting shares prior to this sale.
ACCOUNTING AND DISCLOSURE ISSUES: Disclosure is good, I have no issues with it. However, financial institutions by there nature operate on only a thin sliver of equity. Earnings could turn negative very quickly if there were a large increase in bad loans. This company has reserves against bad loans, but I believe that this reserve of $5.6 million could be consumed very quickly if trouble arose. It's my understanding that any lending institution could easily end up bankrupt if loan losses became excessive.
COMMON SHARE STRUCTURE USED: Unfortunately some shares are multiple voting, while your shares will be single voting. This is a negative indicator.
MANAGEMENT QUALITY: I have no real opinion on management but I do note that they have a good track record.
EXECUTIVE COMPENSATION: Executive compensation seems refreshingly restrained. In particular option grants are moderate. It's interesting that the President received just 3% of the total options granted, this in contrast to many greedy Presidents who (via compliant boards) hog 20% and more of the total options for themselves.
BOARD OF DIRECTORS: An eight member board. Appear well qualified. Most own significant shares which does align their interests with ours.
RISKS: Lending institutions face large risks of the occurrence of bad loans. Also potential risks due to interest rate movements. These risks must be carefully managed. A recession could lead to a sudden increase in bad loans which if severe enough could prove disastrous.
DISCLAIMER: The information presented is not a recommendation to buy or sell any security. The author is not a registered investment advisor and the information presented is not to be considered investment advice. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. The author may at times have a security position in the companies presented. Use the information posted at this site at your own risk. Your use of any information provided here does not constitute any type of contractual relationship between yourself and the provider(s) of this information.   We cannot guarantee the accuracy of this information. The information here is not necessarily up to date or all inclusive. Our opinions and analysis may not always be valid. Our judgment is subject to change without notice.  We hereby deny all responsibility and liability for all use of any information or "rating" provided here.
© Copyright:  investorsfriend.com 1999 - 2002  All rights to format and content are reserved.