Has the Market Mispriced Homeowners Choice?

I believe so!

Homeowners Choice (HCII) now has a peaking earning potential of $2.08, cash of $8.85 per share and no debt, and Real estate valued at $1.12 per share.

We believe Homeowners Choice has targeted diversified insurance policies throughout the State of Florida, knowing hurricanes can be devastating leaving a high level of damage but also damage is often in a compressed area. Because of Homeowners Choice's state diversification model, we now believe that their hurricane risk in Florida is limited to about the $3 million potential risk. So if you assume only one hurricane hits Florida, we still project earnings to be around the $1.60 range.

It's our contention that profitable companies should trade above the level of cash in the bank. At one hurricane or $1.60 times a PE of $9.42 (the property and casualty industry average), this comes to $15.07; At $2.08 times a PE of $9.42, this would be $18.84.

With cash at $8.85 per share plus $1.12 in real estate, which appears to be overlooked, this gives --say a buyout firm with about $9.97 of mostly liquid assets-- an ability to buy a $6.50 company. Plus, then, they would receive the remaining company that has over $2 in earning power.

We believe this downturn provides a good opportunity to invest in a very profitable company trading well below cash and at about 3.125 peak earnings!


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