HDR Research Note 5/10/02

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

STRONG BUY RECOMMENDATION REITERATED

8.0% REDUCTION IN OPERATING EXPENSES CONTRIBUTES
TO AN 18% INCREASE IN NET INCOME

HPSC, Inc., reported preliminary results for the first quarter ended March 31, 2002. Revenues decreased 5% to $12.5 million from $13.5 million, reflecting lower asset sales activity and lower weighted-average implicit rates. The Company reported that for the quarter, operating expenses decreased 8% to $10.8 million from $11.7 million in the same period last year, which contributed to an 18% increase in net income to $1,001,000 from $843,000 for the same period last year. On a fully diluted basis, earnings per share increased 15% to $0.23 from $0.20 last year.

On a sequential quarter basis, revenues were relatively flat and the net income of $1,001,000 showed an increase of 11.6% as compared to the net income in the fourth quarter ended December 31, 2001 of $895,000. The first quarter results came in at the high end of our estimates, and as John Everets, Chairman and Chief Executed officer noted in the release, these results were accomplished "in the face of a challenging market,". He further stated that their "core business of financing medical equipment continues to grow." It is our opinion that these results give credence to our theory that HPSC can continue to growth net income, even during this period of recession and in the face possible future increases in interest rates. From these preliminary results, it appears that HPSC, Inc. is on track to achieve our estimate of fully diluted EPS of $0.98 for this year. The fact that the Company is evidencing positive results from its efforts to control operating expenses bodes well to offset any increase in interest rates that may take place later this year.

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. Based on our estimate of fully diluted EPS of $0.98 for this year, the common stock of HPSC is currently selling at a 7.8 price earnings ratio. Our price target over the next 12 to 18 months remains at $15.00 a share. While the stock is a "quiet" volume trader, we strongly believe that positions taken at these levels offer value and growth investors a compelling buying opportunity for capital growth, and we reiterate our STRONG BUY recommendation. A complete Research Report Update is in the process of being prepared and will be published shortly after the release of the complete data in the SEC 10Q filing for the first quarter ended 3/31/02.

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.