Visa Inc.
HOME CAPITAL GROUP INC. $35 (Toronto symbol HCG; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 34.5 million; Market cap: $1.2 billion; SI Rating: Average) is the parent company of Home Trust Company, a federally regulated trust company. It provides financial services such as chequing accounts, mortgages and credit cards. Home Capital is more risky than Great-West and IGM Financial. That’s because it focuses on customers that usually have trouble meeting the stricter lending requirements of larger banks. But we feel its strong growth prospects help offset this risk. The company now aims to spur its growth by offering traditional mortgages. While that puts it in direct competition with the big banks, Home Capital feels this move will strengthen its position among mortgage brokers....
We advise most investors to place the bulk of their holdings in the Finance sector of their portfolio in two or more of the big five Canadian banks. The banks have been among the market’s top performers for several decades now, and continue to offer an attractive combination of growth and income. We also recommend that investors diversify their Finance investments with non-bank Finance sector stocks, such as these four. Like the big banks, they trade at reasonable levels in relation to their earnings. Great-West Lifeco and IGM Financial also pay above-average dividends. However, we see only three as buys right now. GREAT-WEST LIFECO INC. $32 (Toronto symbol GWO; Conservative Growth Portfolio, Finance sector; Shares outstanding: 894.4 million; Market cap: $28.6 billion; SI Rating: Above average) is Canada’s largest insurance company, with assets under administration of $392.8 billion. The company also provides retirement planning and wealth management services. Power Corp. controls 70.6% of Great-West’s shares....
AMERICAN EXPRESS CO. $39 (New York symbol AXP; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.2 billion; Market cap: $46.8 billion; WSSF Rating: Above average) has moved down in the past few weeks, as rising credit card default rates and slowing consumer spending have hurt its earnings. In the three months ended June 30, 2008, earnings fell 34.9%, to $0.56 a share (total $655 million) from $0.86 a share ($1.0 billion) a year earlier. However, revenue rose 8.7%, to $7.5 billion from $6.9 billion, due to strong growth at its international and business-to-business divisions. The company recently settled its anti-trust dispute with Master- Card Inc. Combined with its earlier settlement with Visa Inc., Amex will now receive $880 million a year for the next three years. This will help offset rising loan losses. A new cost-cutting plan will also improve its long-term profitability. American Express is a buy.
CANADIAN TIRE CORP. $50.10, Toronto symbol CTC.A, fell 7% this week after it reported second-quarter earnings that fell short of earlier forecasts. In the three months ended June 28, 2008, earnings before inventory writedowns and other one-time items fell 13.9%, to $94.7 million or $1.16 a share from $109.8 million or $1.35 a share a year earlier. Overall revenue grew 6.5%, to $2.45 billion from $2.3 billion, mainly due to strong gains at its finance and gas station operations. Same-store sales at its main retail stores fell 0.5%, as cooler-than-normal spring weather hurt sales of patio furniture and other seasonal merchandise. The company expects earnings to improve in the second half of 2008, partly due to the installation of new credit card scanners that let customers make small purchases without a signature. Speeding up checkout lines should improve customer traffic, and encourage repeat visits. Canadian Tire is a buy....
J.P. MORGAN CHASE & CO. $38 (New York symbol JPM; Income Portfolio, Finance sector; Shares outstanding: 3.4 billion; Market cap: $129.2 billion; WSSF Rating: Above average) provides a wide range of banking and other financial services in the United States and over 60 other countries. Morgan recently completed its takeover of troubled investment broker Bear Stearns Cos. Inc. for $1.5 billion in stock. Bear Stearns held about $30 billion in illiquid securities. However, Morgan is only liable for potential losses on the first $1 billion. The Federal Reserve has agreed to cover any losses on the remaining $29 billion.
Quick takeover adds risk
Due to Bear Stearns’ dire circumstances, Morgan had little time to perform the usual due diligence needed for most acquisitions. This increases the chance of an unpleasant surprise. However, Morgan’s experience absorbing other big takeovers in the past few years should help cut its integration risk....
AMERICAN EXPRESS CO. $38.04, New York symbol AXP, has settled its anti-trust lawsuit with MasterCard Inc. Amex had accused MasterCard of illegally blocking U.S. banks from issuing American Express credit cards. MasterCard has now agreed to pay Amex $1.8 billion in quarterly installments over the next three years. Combined with its November, 2007 settlement with Visa Inc., Amex will now receive $880 million a year for the next three years. In 2007, Amex earned $3.9 billion or $3.29 a share. Weaker retail spending has hurt revenue growth at Amex’s credit card business. However, credit card use continues to expand internationally. As well, the Visa and MasterCard settlements will help Amex offset rising loan losses....
HOME CAPITAL GROUP INC. $39.51, Toronto symbol HCG, earned $2.59 a share in 2007, up 32.8% from $1.95 in 2006. Revenue grew 30.6%, to $368.9 million from $282.5 million. The company’s loan portfolio rose 21.5%, mainly due to strong demand for residential and commercial mortgages. Home Capital has no exposure to the U.S. mortgage market. Receivables on its Equityline Visa credit cards rose 40.2% in 2007. The strong results let Home Capital increase its dividend for the eighth time in the past five years. The new annual rate of $0.48 a share, up 9.1% from $0.44, yields 1.2%. Home Capital Group is a buy....
ROYAL BANK OF CANADA $49 (Toronto symbol RY; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.3 billion; Market cap: $63.7 billion; SI Rating: Above average) is Canada’s largest bank, with assets of $600.3 billion. Royal has built up its operations in the United States in the past few years, mainly through acquisitions. The U.S. now accounts for about 15% of its total earnings. Despite its sizable American operations, Royal does not originate subprime mortgages. Securities backed by subprime mortgages and other risky loans account for less than 1% of its assets....
TORONTO-DOMINION BANK $66 (Toronto symbol TD; Conservative Growth Portfolio, Finance sector; Shares outstanding: 717.8 million; Market cap: $47.4 billion; SI Rating: Above average) is Canada’s second-largest bank, with assets of $422.1 billion. In the fiscal year ended October 31, 2007, TD’s earnings rose 23.4%, to $5.75 a share (total $4.2 billion) from $4.66 a share ($3.35 billion) in 2006. These figures exclude several unusual items, including a $135 million after-tax gain on the Visa restructuring. Revenue rose 8.3%, to $14.3 billion from $13.2 billion. Despite its expanding operations in the United States, which now supply 8% of its earnings, TD’s exposure to U.S. subprime mortgages is minimal. TD’s bad loans remained unchanged in 2007 at 0.2% of total loans. It also cut its efficiency ratio to 59.6% from 62.4%....
BANK OF NOVA SCOTIA $47 (Toronto symbol BNS; Conservative Growth Portfolio, Finance sector; Shares outstanding: 984.0 million; Market cap: $46.2 billion; SI Rating: Above average) is the third-largest Canadian bank, with assets of $411.5 billion. Bank of Nova Scotia prefers to focus on developing markets, such as Asia and Latin America, for new growth. These areas give it a better opportunity to quickly improve its market share than more established countries like the U.S. The bank wrote down $191 million (pre-tax) worth of asset-backed securities in fiscal 2007. However, this was more than offset by a $202 million (pre-tax) gain from the Visa restructuring. That helped earnings grow to $4.01 a share (total $4.0 billion), up 13.0% from $3.55 a share ($3.6 billion) in 2006. Revenue rose 11.6%, to $12.5 billion from $11.2 billion....