The Canadian equity markets have been upbeat this month, with the S&P/TSX Composite Index rising 6.6%. The signs of inflation easing and the pause in interest rate hikes have increased investors’ confidence, thus driving the equity markets. Amid the growing optimism, interest in growth stocks, including goeasy (TSX:GSY), have revived.
The company has outperformed the broader equity markets this month by rising over 17.5%. Its solid third-quarter performance and discounted stock price led to strong buying, driving the stock price. Despite the recent surge, it still trades at a considerable discount from its 2021 highs. Now, let’s assess the strength of goeasy’s stock price rally by looking at its third-quarter performance and growth prospects.
goeasy’s third-quarter performance
Earlier this month, goeasy reported a solid third-quarter performance. It generated a record $722 million in loan originations during the quarter amid rising demand, with applications for credit growing 30%. The record loan originations expanded its loan portfolio to $3.43 billion, a 33% increase from the previous year’s quarter.
Meanwhile, the company also continued to witness stable credit and payment performance, thus lowering its net charge-off rate to 8.8%, down from 9.3%. Also, its net charge-off rate was close to the lower end of the earlier stated guidance of 8.5-10.5%. The improvement in the credit and product mix of the loan portfolio and its credit and underwriting enhancements over the last two years led to a stable credit and payment performance.
Its allowance for future credit losses declined from 7.42% to 7.37%, which is encouraging. Further, its efficiency ratio (non-interest expenses/revenue) improved 400 basis points from 32.6% to 28.6%, indicating a rise in operating leverage.
Amid the solid operating performances, goeasy’s revenue and adjusted net income grew by 23% and 34%, respectively. Its operating margin expanded 450 basis points to 39.3%. Its adjusted EPS (earnings per share) stood at $3.81, representing a 29% increase from $2.95 in the previous year’s quarters. Also, its adjusted return on equity increased 170 basis points to 26.6%. Now, let’s look at its outlook.
goeasy’s growth prospects
goeasy’s diversified product base, omnichannel offerings, cross-selling opportunities, and improving credit quality could continue to drive its financials. The company has enhanced its underwriting and income verification processes, tightened its credit tolerance, and introduced next-generation credit models to reduce default rates, which could continue to drive its financials in the coming years.
Amid these growth initiatives and rising demand, goeasy’s loan portfolio could expand to $5.1 billion by the end of 2025, representing an increase of 48.7% from its current levels. Amid the expansion of the loan portfolio, the management expects its revenue to grow at 34.5% while delivering a return on equity of over 21% annually. So, goeasy’s growth prospects look healthy.
Investors’ takeaway
Despite the recent increase in its stock price, goeasy trades at an attractive valuation, with its NTM (next 12-month) price-to-sales and NTM price-to-earnings multiples of 1.5 and 7.9, respectively. The company has also rewarded its shareholders by raising dividend at a CAGR of over 30% since 2014. Meanwhile, its forward yield currently stands at 2.97%. Considering all these factors, I believe the rally in goeasy could continue, making it an excellent buy.
