Canada’s top performer consumer lender stock goeasy (TSX:GSY) has been under immense pressure recently. It has lost 35% in the last three months and is currently trading close to its 30-month lows. GSY stock has generated immense shareholder wealth in the last decade thanks to its strong execution and financial growth. However, the recent regulatory headwinds have punched it in the face.
goeasy and its immense value creation
A $1.5 billion lender, goeasy primarily caters to non-prime borrowers and charges high-interest rates. The value lender offers a full suite of products like point-of-sale financing as well as secured and unsecured loans. As traditional financial institutions moved away from riskier lending since the financial meltdown, it significantly expanded the addressable market for companies like goeasy.
goeasy has shown immense growth since 2008, thanks to its prudent underwriting and channel expansion. Notably, its net income has grown by 29%, compounded annually in the last 10 years. That’s a categorically rare feat, especially in a risky consumer lending business.
GSY stock also remarkably outperformed broader markets and peer lenders due to its industry-leading growth. It returned 1,027% in the last decade, including dividends. Management has increased dividends for the last nine consecutive years and GSY currently yields a decent 4.3%.
How the regulatory order could impact goeasy
However, goeasy might soon hit a roadblock. Last month, the Federal government announced its plan to lower the maximum allowable annual rate of interest on loans from 47% to 35% — a potential blow to goeasy. The regulators could bring the rates further lower in the long term. This action could lower goeasy’s total portfolio yield and negatively impact its financials. The management has clarified that only one-third of its total portfolio has a rate higher than the proposed one.
However, it will be interesting to see how the company’s guidance changes. It is set to release Q1 2023 earnings on May 9. According to the current guidance, goeasy expects over 35% operating margins and a 22% return on equity. It has almost always overachieved its guidance in the past. This time, the management commentary and guidance update will be key drivers for the stock. The upcoming earnings report will shed important light on its future growth path.
Even the current proposed annual rate is predatory from the borrower’s perspective. However, higher rates significantly drove goeasy’s growth all these years. Its sound balance sheet and compelling execution have been goeasy’s key strengths. Moreover, its scale and operating leverage helped drive financial growth. The lender’s unsecured loans are insured by a third party, while assets back a large portion of the total loan portfolio.
Valuation
GSY stock is currently trading 10x its earnings and looks discounted. The stock will likely move higher if the management keeps its existing guidance and reiterates the negligible impact of the potential new rates. For new investors would be prudent to wait till the company releases its Q1 earnings. The report will clear many uncertainties and give a clearer picture of the stock’s risk-reward potential.
