Homeowners Choice, Inc: HCII 0.00 [N/A]
September 23, 2009
RE: High Cash Stock Review on Homeowners Choice, Inc. (HCII $8.20) – An Insurance Company
Step 1 – We first search for companies with pristine balance sheets.
Homeowners has roughly 115 million dollars in cash, or $17 per share, and no long term debt. Homeowners has a great balance sheet.
Step 2 – We like extremely low enterprise values.
When you subtract out the cash and debt out of the enterprise, Homeowner’s enterprise value or the value of the ongoing operations of the company actually has negative value, the cash is far greater than the value of the company. So if you buy the company for say about 8 dollars per share, or roughly 54 million dollars, could the new owners pay themselves a profit of about 50% return, plus still own a company with about $100 million in annualized premiums? The answer is YES. You theatrically buy 100% of this company, say for 8 dollars, and immediately pay a dividend to yourself of $12 giving yourself a 50% return, plus still own a profitable $100 in premiums company.
The company’s main business (with millions in premiums and is profitable) has a negative value, this is very rare for a very profitable enterprise.
Step 3 – Is the operation or enterprise driving value to the shareholders?
Homeowners receives another yes. They had an outstanding quarter, as they made .42 cents per share in profit. The current trailing 52 week earnings is 2.16 and the PE ratio is around 3.75. Not only is the PE low, but there is room for many more increases in profits. The average PE ratio for the insurance industry is 15. So if Homeowners were to revive the average PE ratio, it would give a value of about about a $32 per share stock.
Current trailing earning and PE ratio:
Step 4 – Is this a good business?
We believe this is a very good business with a model that is right for the homeowners in Florida. Homeowners Choice today serves approximately 60,000 policyholders throughout Florida. Florida and California (due to Hurricane and Earthquakes) need homeowners insurance more than any other states that I could think of, it’s a tough business to replicate, and the largest competition, Citizens, is controlled by the State.
The Florida Office of Insurance Regulation has approved Homeowners to acquire up to 95,000 policies from Citizens Property Insurance Corporation, the state-sponsored insurance company. I have seen little to no new players entering this market, and many of the majors insurance firm are leaving the state.
Step 5 – Is the Train Wreck and, then, the fog from the Wreck clearing?
When finding companies around cash value, often there is what we call a Train Wreck. The many hurricanes, I believe, have created this extremely low value or, in this case, negative value. A value this low is usually based when the company’s long term survival is in question. Since Homeowners Choice has limited their total exposure to hurricanes due to re-insurance, we can not identify why this company has such a low value. To limit its own exposure, Homeowners Choice “expects to focus on middle-class homes spread throughout Florida” Paresh Patel said.
Demotech, Inc., a leading actuarial and financial analysis firm, has awarded Homeowners Choice a Financial Stability Rating of “A” (Exceptional). Demotech’s Financial Stability Ratings are designed to indicate the financial stability of a property and casualty insurer. Click here to visit their website. Since Demotech gave them an exceptional grade, we believe they also can not identify any major risk that’s often associated with this low of value.
Now that we are almost out of hurricane season, the company and it’s future prospects are truly looking very good, but they still have a negative enterprise value! You must trust me here – an enterprise that has just earned .42 cents profit for the last quarter and around 100 million dollars in premiums should have an positive real value above cash.
If you add the $17 per share of cash plus the $32 that we received from calculating 15 times the 52 week earnings, we get an combined value for the company of $49 a share. Yes, Homecare must prove over a longer time period that it’s a very profitable company to achieve anywhere close to this value and it still has plenty of work to do. Yet, it appears it’s coming down the track of creating tremendous wealth for our clients. Our calculation of current fair value is a 600% or more increase over current values.
Yes, and absolutely yes, I and related accounts own this company. We started buying around $7.32 per share. I just wish I could raise the money and buy the whole company. We like to invest in profitable business enterprises that have almost zero or, like in this case, a negative enterprise value. I’m sure other successful business persons would also like to do the same.
P.S. I can’t wait and am already sorting through the new wreckage. If you would like other ideas like Homeowners, please give us your email and phone number. Making money after a demise can be fun and rewarding, and, if done right, you can help reduce the many risks that is involved with every equity investment.
Financial Investment Adviser
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