Element Financial Corp. raised its earnings outlook for 2015 and plans to announce its first dividend next year as a robust U.S. economy, lower oil prices and a weaker Canadian dollar stoke its vehicle-finance business.
North America’s third-largest lender for commercial fleets ranging from FedEx Corp. trucks to Bobcat loaders will likely double its assets to $20 billion by the end of 2016. After that, a “significant dividend” will probably be paid, Chief Executive Officer Steve Hudson said in an interview. Element raised its forecast for pre-tax profit for the year by 8.3%, according to a statement released after his comments were published.
“I have never seen the economy as strong in the U.S. as it is today,” Mr. Hudson, 56, who has been in the commercial finance business for 26 years, said at his office in Toronto.
Element, which finances purchases of cars, trucks, aircraft, rail cars and other equipment, derives about 60% of its sales from the U.S. and expects that share to rise to 70% this year. It had assets of $10.5 billion at the end of September.
The integration of acquired units such as PHH Arval, a Sparks, Maryland-based fleet-services provider, will help it get there, Mr. Hudson said. The surge in the U.S. dollar also means more profit in Canadian dollar terms.
“People who didn’t buy F-150s or cars during the recessionary period are back in the market,” Mr. Hudson said of rising U.S. demand for vehicles such as the Ford Motor Co. pick- up truck.
Element raised the 2015 adjusted-earnings forecast to $1.44 a share, from $1.33, and said the estimate for the fourth quarter of 2014 is 19 cents. That’s slightly ahead of analysts’ expectations of 18.5 cents a share, according to data compiled by Bloomberg.
Element bought PHH Arval from PHH Corp. in a $1.4 billion purchase last June as part of its efforts to expand in the U.S.
Ontario Government
The West Texas Intermediate crude benchmark has plunged 57% in seven months and the Canadian dollar has declined 19% against the U.S. currency over the past two years.
While the U.S. is a rapidly growing business, Element has also been hustling for new Canadian opportunities, including lobbying the Ontario government to sell and lease back its fleet of cars and trucks, he said.
Element went public in 2011, marking the return of Mr. Hudson to Bay Street, Toronto’s financial center, after a decade in self-imposed exile in the U.S. He moved from Canada after a misstep with commercial paper at one of his previous ventures, Newcourt Credit Group, stripped about $2 billion of market value before the firm was sold to CIT Group Inc. in 1999.
During his time in the U.S., Mr. Hudson ventured off the beaten path of his financial endeavors to acquire the Hair Club for Men with partners for about $25 million and became its president and CEO. He said he adapted one of his old leasing agreements for the market.
Leasing Toupees
“We turned the hair business into a lease book,” he said. “It was sort of the joke of the cocktail circle until we sold it for close to $200 million.”
Mr. Hudson said he learned his lesson at Newcourt, and Element avoids commercial paper — something he once referred to as “financial market heroin” — and other high-risk financial tools.
The strength of the U.S. economy isn’t the only catalyst for Element in the coming months, said Shubha Rahman Khan, a Toronto-based analyst at National Bank Financial.
“To me it seems like a slam dunk this year,” Khan said. “There are just too many positive catalysts to ignore.”
Khan said he expects several debt-rating companies to ascribe Element an investment grade rating later this year. The company is rated BBB+, the third-lowest investment grade, at Kroll Bond Rating Agency.
Shares Plateau
Element is also seeing cost savings of as much as $30 million from the integration of PHH Arval, exceeding the original target of $25 million, Mr. Hudson said. That will likely help boost its earning power, Khan said.
Element’s shares have plateaued over the past year, trading between $12.21 and a $15.50 record high in March, after more than tripling since its 2011 IPO.
Twelve of the 13 analysts covering the stock recommend buying it, while one says sell, according to data compiled by Bloomberg. The 12-month target price for the stock is $19.04 a share, according the data.
Element fell 0.5% to $13.86 in Toronto Wednesday, for a market value of $3.66 billion.
Part of the reason the shares have stagnated recently is that many Canadian investors who bought into the lender’s plan to expand through acquisitions sold their holdings as it shifted to organic growth following the PHH deal, said John Aiken, an analyst at Barclays Plc.
Possible Acquisitions
At the same time, U.S. investors have been reticent to buy on concern that a faltering U.S. shale oil and natural gas industry may hurt its rail-car business, Aiken said. Only about 4% of Element’s total earning assets are tied to the sector, and the fears are “overblown,” the analyst said.
“Oil is still needed to fuel the U.S. economy and, regardless of where the price is, it’s going to have to be shipped,” Aiken said.
Element is still interested in acquiring smaller fleet portfolios in the $500 million-range or less, and plans to finance the deals primarily through debt, Mr. Hudson said.
Mr. Hudson says he still has to string a few good quarters together and prove he won’t go in for the sort of manoeuvres that got him in trouble at Newcourt. He jokes about a young banker who pitched him on commercial paper to finance one of Element’s first fleets.
“I told him to take two minutes and Google my name and ‘commercial paper,’” he said.
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