HDR Research Note

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

STOCK PRICE PRESENTS MAJOR BUYING OPPORTUNITYSTRONG BUY

RECOMMENDATION REITERATED WITH PRICE TARGET OF $15

January 28, 2002

We originally recommended HPSC shares on December 17, 2001 at a price of $7.85. In our opinion, this current weakness (AMEX: $6.80) affords investors a major buying opportunity. Since our December 17th recomendation, the average daily volume on this stock has been only 4,200 shares/day. We believe any buying interest will quickly rally the stock and we reiterate our STRONG BUY recommendation.

After reducing interest rates eleven times in the past thirteen months, the Federal Reserve Board has indicated that for now the interest rate cuts are through. Many finance companies traded down in reaction to this news. This was based on the perception that with interest rates having bottomed out, earnings for these companies have possibly peaked. This is not the case for HPSC.

The company completed a major financing in December of 2000. It raised $527 million using an equipment receivables backed securitization program that has enabled HPSC to originate over $250 million in finance contracts with most attractive spreads for the Company. We are still comfortable with our EPS estimate for the 2001 fourth quarter ended 12/31/01 of $0.24. This will result in EPS of $0.84 for the entire 2001 year. We are projecting an increase in EPS for this year, 2002, of 24% to $0.97. While loan volume may be lower in this economy, the spread should still allow HPSC to report bottom line numbers in line with our estimate.

Based on the current price ($6.80) and our 2001 and 2002 estimates, HPSC is selling at a price earnings ratio of 8.7x for the year ended 12/31/01, and only a price earnings ratio of 7.0x for this year. The book value per share (adjusted for the impact for FASB 133) is $10.75. Based on the current price, the stock now sells for at a 37% discount from book value.

We reaffirm our price target for 12 months of $15 for HDR.

J.M.Dutton & Associates, LLC. John M. Dutton, President and Supervisory Analyst, 801 S. Figueroa, Suite 1120, Los Angeles, CA 90017 Phone (213) 929-2616, Fax (213) 896 0457 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.