Home Capital Doing Well in Down Market

| About: Home Capital (HMCBF)

Investors' indiscriminate flight from smaller cap financial stocks over the past several months has unduly punished the share price of several companies still doing a brisk business, including Home Capital Group Inc. (OTC:HMCBF).

As one of the handful of non-bank alternative mortgage lenders still standing in Canada in the wake of the U.S. subprime meltdown, Home's bottom line has benefited from reduced competition in a Canadian market where 20% of home loans are still made through alternative lenders, even as overall demand for homes in several markets falls.

As evidence, the Toronto-based company reported on Tuesday a 20% rise in earnings growth last quarter, with diluted profit of 84 cents a share compared with 70 cents in the final quarter of 2007.

Traditional revenues from interest on home loans continued to fall last quarter in unison with central rate cuts. However, Home was able to offset the decline with a strong uptake of its insured mortgage-backed securities, which had the added benefit removing liabilities off its balance sheet.

Desjardins Securities analyst Michael Goldberg wrote in a note to clients Wednesday:

Home met each of its 2008 objectives set at the start of the year, and continues to steer clear through the turbulent environment, unlike many other financial institutions.

Home also remains debt free, which has prompted ratings agencies Standard & Poor's and Fitch to recently reaffirm their investment grade outlook on the company.

Loan risks are expected to increase in the coming quarters, while Home’s interest spreads will be subdued as interest rates hover at historic lows, the company said this week.

Thus, the lender sees more modest earnings growth of between 10-15% in 2009, prompting Mr. Goldberg to lower his EPS estimate to C$3.55 this year from C$3.80.

Yet, the analyst maintains his Buy rating on the stock with a 12-month price target of C$31 — a 70% appreciation over Home’s current trading price of around C$18.