Is goeasy Stock a Buy After its Q1 Earnings?

goeasy stock has returned a massive 1,220% in the last decade.

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Consumer lender stock goeasy (TSX:GSY) plunged 35% between February and early May 2023. The reason was quite evident, as Canadian regulators announced their intention to trim the annual maximum interest rate from 47% to 35%. After enjoying such sky-high rates for so many years, investors thought this was a potential blow for goeasy. However, the management kept the company’s positive guidance intact in its recently released first-quarter (Q1) earnings. The stock rebounded subsequently and is up 15% for the month.

How goeasy became investors’ darling

The $1.75 billion goeasy mainly caters to non-prime borrowers. As traditional financial institutions moved away from lending to subprime and non-prime borrowers, particularly after the 2008 financial meltdown, the addressable market for lenders like goeasy increased substantially.

But despite being in a risky industry, goeasy has seen consistent operational and financial performance over the years. Its revenues grew by 18% while the net income expanded by an astounding 29% compounded annually in the last decade. It’s superior profitability and stable margins indicate stellar earnings quality. As a result, the stock has returned a massive 1,220% in the last decade.

For the quarter that ended on March 31, 2023, goeasy saw loan receivables jump 38% year over year to $2.99 billion. This was driven by higher demand across all its product lines like automotive financing, home equity loans, and point-of-sale financing. The company’s total operating income increased to $102 million during the quarter, marking a decent 28% growth year over year. Such an increase, even amid macroeconomic uncertainties, speaks about its fundamental strength and scale.

What’s next for goeasy?

goeasy has gradually expanded its product range and loan amounts over the years. Its prudent underwriting and omnichannel presence have been the key to its consistent performance.

The management clarified on the new proposed annual interest rate during the company’s Q1 earnings call. It said that the new rate will make the industry relatively less attractive for new entrants, reducing the supply of credit. So, this will ultimately help goeasy expand its market share due to the scale advantage. As a result, the management kept its long-term guidance intact.

For 2025, goeasy expects its gross loan receivables to reach close to $5 billion. Its operating margin is forecasted at over 38% in 2025, indicating a decent expansion from current levels. GSY’s return on equity will likely keep upwards of 21%, implying consistent profitability. Its long-term average return on equity comes close to similar levels. So, the new regulatory headwinds are unlikely to make any material impact on its profitability and shareholder value.

Valuation

GSY stock is currently trading eight times its earnings and looks undervalued. Considering its superior performance over the years and a recent correction, GSY stock should trade at a higher valuation multiple. In comparison, the industry average is much higher and indicates GSY’s relative discount.

GSY will likely create handsome shareholder value in the next few years with its operational and financial growth prospects. With the new expected regulatory changes, goeasy’s yield on consumer loans will likely see little or no impact. This creates the possibility of sending the stock to its pre-correction levels.  

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

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