The Motley Fool

Is it Time to Buy Home Capital Group Inc.?

Home Capital Group Inc. (TSX: HCG), one of the largest financial institutions in Canada, released third-quarter earnings on November 5 and its stock has fallen more than 20% in the weeks since. Let’s take a closer look at the quarterly results to determine if we should use this weakness as a long-term buying opportunity or if it is a warning sign to stay away.

Breaking down the third-quarter results

Here’s a summary of Home Capital’s third-quarter earnings compared to its results in the same period a year ago.

Metric Reported Year-Ago
Earnings Per Share $1.05 $0.95
Revenue $255.05 million $239.43 million

Source: Home Capital Group

Home Capital’s earnings per share increased 10.5% and its revenue increased 6.5% compared to the third-quarter of fiscal 2013. These strong results were driven by net income increasing 11% to $73.76 million and net interest income increasing 10.3% to $117.58 million.

Here’s a quick breakdown of eight other key statistics and updates from the release:

  1. Total assets increased 3.6% to $20.56 billion compared to $19.84 billion in the year-ago period.
  2. Total loans increased 2.2% to $18.49 billion compared to $18.08 billion in the year-ago period.
  3. Total deposits increased 17.5% to $14.02 billion compared to $11.94 billion in the year-ago period.
  4. Net interest margin of 2.29% compared to 2.16% in the year-ago period.
  5. Total mortgage originations increased 28.1% to $2.55 billion compared to $1.99 billion in the year-ago period.
  6. Return on shareholders’ equity of 22.0% compared to 24.3% in the year-ago period.
  7. Efficiency ratio of 29.9% compared to 29.6% in the year-ago period.
  8. Book value per share increased 21.3% to $19.57 compared to $16.14 in the year-ago period.

Lastly, Home Capital announced an 11.1% increase to its quarterly dividend to $0.20 per share. The increase brings the company’s annual dividend to $0.80 per share and gives its stock a yield of approximately 1.8% at current levels.

Should you be a buyer of Laurentian Bank today?

Home Capital Group is one of Canada’s largest holding companies and the growing demand for its mortgages led it to a very strong third-quarter performance. However, the market has not reacted positively, sending its stock over 20% lower in the weeks since and it now sits nearly 22% below its 52-week high of $55.94 reached back in August.

I think the weakness in the stock represents a long-term buying opportunity, because at current levels, it trades at very inexpensive valuations — just 9.4 times next year’s earnings estimates and only 2.2 times its book value per share. With these valuations in mind, I think long-term investors should consider initiating long-term positions in Home Capital Group today and adding to them on any further weakness provided by the market.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

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