From today's Globe & Mail
Subprime, Canadian style
David Berman, today at 3:50 PM EDT
Nothing suggests Canada's housing market is different than the U.S. market quite like Home Capital Group Inc. It is, after all, a subprime mortgage lender, operating in an environment in which “subprime” has become a dirty word in the United States – and yet Home Capital is thriving by most measures.
In its second quarter, the number of new mortgages rose 42.5 per cent over last year, credit quality remained strong, earnings rose nearly 21 per cent over last year and management bumped up the dividend by 8 per cent.
There's one problem though: Investors are clearly nervous about some sort of spillover effect from the United States, despite assurances from experts that all is well. Home Capital's share price remains nearly 12 per cent below its peak in 2006 and is down 10 per cent in 2008.
But you can't argue with Home Capital's results. Phil Hardie, an analyst at Scotia Capital, believes the company should be able to grow its earnings at a rate of 15 per cent to 20 per cent annually over the next five years. Although he maintained a “sector perform” recommendation on the stock, he raised his 12-month price target slightly, to $47 from $46, based on higher estimated earnings for 2009. The stock traded at $37.40 on Wednesday afternoon, down $1.60.
Still, Mr. Hardie isn't so different from wary investors after all, remarking in his note that he is on the lookout for signs of deterioration in the Canadian housing market, particularly in Ontario.
“Although the current fundamentals are strong for the remaining non-prime mortgage lenders, the sector is economically sensitive,” he said in a note to clients. “In our view, falling home prices and a weakening consumer credit environment are key risk factors for all mortgage lenders, and in particular Home Capital Group.”