A leading non-prime consumer lender in Canada, goeasy (TSX:GSY), reported its first-quarter (Q1) results this week. It sounds like it had superb results, triggering a jump of 12% in the stock as of writing. This is a return (in a day!) that beat the long-term average Canadian stock market return of about 8% per year.
The growth stock is too cheap to ignore
Obviously, the growth stock was too cheap ignore. In fact, investors can argue that goeasy remains a great buy today. Analysts certainly agree. (We’ll cover the valuation of the stock later in the article.)
Let’s first discuss why the stock lost half of its value (still!) from its peak in September 2021. In hindsight, it’s easy to see its stock valuation was in bubble territory then. As high inflation followed by rising interest rates occurred, there were increasing concerns about the health of the economy. In fact, economists believe Canada will enter a recession in 2023, though, a mild one.
Surely, higher interest rates make it costlier to borrow, ushering Canadians, particularly those with non-prime credit, to think three times before borrowing. Additionally, the non-prime Canadian lending industry has been faced with tighter regulation.
As previously disclosed in late March, the Government of Canada announced through the Federal Budget that it intends to reduce the maximum allowable interest rate to an annual rate of 35%, which is why goeasy had to lower its prior forecasts, but thankfully not by much. Because the company is a large operator with scale and diversification of products and services, it has been lowering the interest rates it charges consumers over time anyway. Perhaps the regulation speeds up its efforts to lower interest rates for its customers. After all, goeasy aims to help its customers back to prime lending.
Let’s dig into why investors loved the stock after it reported earnings.
Q1 results
It seems that higher interest rates haven’t affected Canadians’ appetite for non-prime credit. The company served more than 1.3 million customers in the quarter. Year over year, goeasy witnessed loan origination jump 29% to $616 million, loan growth of 58% to $196 million, and the enlargement of its loan portfolio by 39% to $2.99 billion. Revenue also elevated 24% to $287 million, eventually translating to adjusted earnings per share rising 14% to $3.10. The adjusted return on equity (ROE) of 23.9% remains desirable.
The company’s fully-drawn weighted average cost of borrowing was 5.7%, up from 4.3%. Thanks primarily to the growth of its consumer loan portfolio, the company increased its assets by 30% to $3.49 billion. At the end of the quarter, its debt-to-capital ratio was 72%, which aligns with the company’s target range for its leverage ratio. During the first quarter (Q1), it was also able to increase its credit facility, which is underwritten by a group of big banks, by 37% to $370 million.
Outlook, valuation, and returns potential
In light of the macro environment development, tighter regulation, and among other factors, goeasy reduced its prior forecast for 2023-2025 particularly in the perspective of slightly lower ROE and a lower total yield on consumer loans of up to 1% for 2024-2025.
Basically, at $107 and change per share at writing, the undervalued stock remains a bargain at about 8.6 times its blended earnings. Analysts have an average 12-month price target of $157.30 per share, which represents near-term upside potential of 46%.
Let’s not forget that goeasy also offers a growing dividend with an initial yield of 3.6%. So, over the next few years, the growth stock has the potential to deliver about 27% per year from its dividend, earnings growth, and valuation expansion.
