Our report for Element Financial is updated with a rating of Speculative Buy at $13.60 (It closed today at $13.55).
I have a mixed message here. Based on the numbers, Element looks like good value. And it is about to split into two separate companies on October 3 specifically to try to increase the share value. And it is likely to continue to grow.
However, I have a hard time getting past the incredibly high executive compensation and especially management’s aggressive view of adjusted earnings which adds back very considerable amounts of non-cash equity compensation as if it were not a cost of doing business, and they also appear to even add back the preferred share dividends and all income taxes. And this quarter with the higher Canadian dollar which lowered their numbers they provided growth on a currency neutral basis. But they did not do that when the currency was moving in their favour. All in all, I found I was not willing to trust this management.
Still, I will hang onto my shares at least until we see if the split in the company increases its value this Fall.
It is remarkable that Element was able to raise equity and borrow billions of dollars to grow so fast. Another worry though is that in the finance business it is easy to grow by purchasing loans. And that has apparently worked out well with a bonus as interest rates fell. But it can also work out badly. In the world of lending money, profit is not really known until the loan is paid back (since there could be bad loans). Element does appear to be reasonably profitable and with profit ratios trending up. But the possibility of bad loans always lurks.