BMO UpdateBelow is summary from BMO update on Sep 3. Even in a severe downturn of the housing market, Shah figures they could make 2.60 per share eps.
Valuation
No change. The target price of $45 reflects 12.7x our 2009E EPS estimate of
$3.55.
Recommendation
Home Capital is rated Outperform. Over the past month, the company’s stock
price has fallen by about 10% on fears of a housing downturn. We believe the
market has overreacted. In our view, Home Capital is capable of generating
respectable returns in a difficult environment. This is not surprising given that
Home Capital derives nearly 75% of its revenue from its loan portfolio and has
a relatively flexible cost structure. We believe that in a challenging operating
environment, Home Capital is capable of generating EPS of around $3.00 and
an ROE of 22%. Even in a severe housing market slowdown, we estimate the
company could generate EPS of $2.60 and an ROE of 20%. This is impressive
and is a testament to the company’s best-in-class alternative lending model,
conservative lending practices and a strong balance sheet. In our view, the
downside risk is limited and Home Capital offers a good risk/reward
opportunity at current price levels. In case of a severe housing market
slowdown, the stock price could fall to $30, reflecting 11.5x estimated 2009
earnings of $2.60 or 2x projected book value of $14.80. However, if the
downturn is not as severe (but more severe than reflected in our current 09E
EPS and $45 target price), the price could rise to $38, reflecting 12.7x estimated
2009 earnings of $3.00 or 2.5x projected book value of $15.20.