Has the Market Mispriced Homeowners Choice?

| About: HCI Group, (HCI)

I believe so!

Homeowners Choice (HCII) now has a peaking earning potential of $2.08, cash of $8.85 per share and no debt, and Real estate valued at $1.12 per share.

We believe Homeowners Choice has targeted diversified insurance policies throughout the State of Florida, knowing hurricanes can be devastating leaving a high level of damage but also damage is often in a compressed area. Because of Homeowners Choice's state diversification model, we now believe that their hurricane risk in Florida is limited to about the $3 million potential risk. So if you assume only one hurricane hits Florida, we still project earnings to be around the $1.60 range.

It's our contention that profitable companies should trade above the level of cash in the bank. At one hurricane or $1.60 times a PE of $9.42 (the property and casualty industry average), this comes to $15.07; At $2.08 times a PE of $9.42, this would be $18.84.

With cash at $8.85 per share plus $1.12 in real estate, which appears to be overlooked, this gives --say a buyout firm with about $9.97 of mostly liquid assets-- an ability to buy a $6.50 company. Plus, then, they would receive the remaining company that has over $2 in earning power.

We believe this downturn provides a good opportunity to invest in a very profitable company trading well below cash and at about 3.125 peak earnings!

Valuation Ratios Company Industry S&P 500
P/E Ratio 8.36 *9.42 28.15
Beta 0.43 n/a 1.00
Price to Sales 0.63 0.99 n/a
Price to Book 0.89 0.86 3.41
Price to Cash Flow 3.66 7.31 13.18
% Owned Institutions 1.61 50.64 n/a
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Disclosure: Durig Capital, Randy Durig, their clients and related accounts have purchased Homeowners Choice with the majority around $8.