HDR Research Note

HPSC Inc. (HDR)
By: By Richard West, CFA

HPSC, INC. REPORTS FOURTH QUARTER AND YEAR END
REVENUE AND EARNINGS GROWTH

STRONG BUY RECOMMENDATION REITERATED

For the year ended December 31, 2001, HPSC reported revenues of $53.5 million a 2.2% increase over last years revenues of $52.3 million. Net income for the year was $3.2 million or $0.74 per diluted share as compared to reported net income of $87,000 or $0.02 per diluted share for last year. (Note: Adjusting for the costs incurred in completing the major term securitization for the year 2000, the adjusted earnings per diluted share would have been approximately $0.75.) In the second quarter of 2001, the Company took a one-time pre-tax charge of $819,000 associated with the settlement of a lawsuit. Excluding this one-time charge, the Company's operating net income after taxes for the year ended December 31, 2001 would have been $3.7 million or $0.85 diluted net income per share. During the year 2001, HPSC increased the volume of new financing contract originations to $263 million, a 6.0% increase over last year. The gross portfolio of owned and managed leases and notes receivable at year-end 2001 increased 16% to $807 million from $696 million at the end of 2000.

For the fourth quarter ended December 31, 2001, HPSC reported revenues of $12.7 a decrease of $2.4 million from last year's fourth quarter of $15.1 million. The lower revenue figure reflects a $2.5 million decrease in "gain on sales of leases and notes" from year 2000 and a $1.2 million less "provision for losses" in 2000 as compared to 2001. Net income for the fourth quarter 2001 was $895,000 or $0.23 per diluted share as compared to reported net loss of( $2.2 million) per diluted share for last year. Adjusting for the costs incurred in completing the major term securitization last year, the adjusting earnings per diluted share would have been approximately $0.21.

These results came in at the high end of our estimates, and as John Everets, Chairman and Chief Executed officer noted in the release, were accomplished "?.in the face of a challenging market." The lower revenue numbers reflect this "challenging market," however the higher net income reflects the continued control of expenses and the results of timely financing on yield spreads.

Cash Equivalents and Restricted Cash at year-end 2001 was $33,981,000, up from $21,997,000 at year-end 2000. Senior notes and notes payable to banks were $336,806,000 at year-end 2001, down from $404,461,000 at year-end 2000. Considering the increased loan portfolio of owned and managed leases and notes receivable at year-end 2001 of $807 million, and the lower debt level, we are maintaining our estimated fully diluted EPS for 2002 of $0.98.

We originally recommended HPSC on December 17, 2001 at a price of $7.85 and we continue to believe the stock affords investors a major buying opportunity. At current price of $7.00, the stock of HPSC is selling at a 8.2 price earnings ratio based on the adjusted fully diluted EPS of $0.85 for last year and a 7.0 price earnings ratio based on our fully diluted EPS of $0.98 for this year. Our price target over the next twelve to eighteen months remains at $15.00 a share. We strongly believe the present level offers value and growth investors a compelling buying opportunity and we reiterate our STRONG BUY recommendation.

J.M.Dutton & Associates, LLC. John M. Dutton, President and Supervisory Analyst, 1129 Manning Drive, Suite 310, El Dorado Hills, CA 95762 Phone (916) 941-4985, Fax (978) 418-6422 Email: [email protected] Web site: www.JMDutton.com

Information, opinions or recommendations contained in this research note are submitted solely for advisory and information purposes. The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Such information and the opinions expressed are subject to change without notice. This research note is not intended as an offering or a solicitation of an offer to buy or sell the securities mentioned or discussed. Neither the Firm, its principals, nor the assigned analysts own or trade shares of any company covered. The Firm does not accept any equity compensation. Anyone may enroll a company for research coverage, which costs US $22,000 prepaid for one-year. Reports are performed on behalf of the public, and are not a service to any company. The analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests and insure independence. Please read full disclosure and other reports and notes on the Company at www.JMDutton.com.