Goeasy Ltd. (TSX:GSY) has been a clear winner in recent years. This has been true with regard to its stock price performance as well as its financial performance. In fact, goeasy stock has increased 74% in the last year and 239% in the last five years.
But what is the reason for its 4.4% rise on Monday?
Goeasy stock reacts to strong fundamentals
As a Canadian non-prime consumer credit lender, goeasy has a large market. In fact, there are more than nine million non-prime Canadians, 72% of which have been denied credit by the banks. This means that there are a lot of Canadians in need.
Fourth quarter 2023 results were released in February. They included record loan applications and originations (+12%), as well as a 31.5% increase in earnings per share (EPS) to $4.01. Also, free cash flow grew 29% to $85 million.
As a result, the company increased its annual dividend for the tenth consecutive year, to $4.68 per share. This represented a very healthy 22% increase. The dividend yield is currently 2.8%, with a payout ratio of 33%.
Valuation remains low
One thing that strikes me when looking at goeasy is its strong returns and low valuation. The company’s profit margin is almost 20%, and its return on equity (ROE) exceeds 25%. At the same time, goeasy stock trades at depressed multiples. For example, the stock trades at 2.7 times book value and 10 times this year’s earnings estimate. This is a combination that is obviously very attractive.
It’s worth noting at this time that goeasy’s stock price has fallen hard from its 2021 highs. In fact, GSY is down almost 25% from those days. This realization, along with the company’s continued strong fundamentals and low valuation, probably impacted trading on Monday. Therefore, the stock rallied.
What’s next for goeasy?
In the company’s fourth quarter, the weighted average interest rate that goeasy charged on its loans was 30.25%, while its total yield was 34.9%. Meanwhile, the company’s weighted average cost of capital is 6.9%. This speaks to the profitability of the business, which is reflected in its strong results.
Interestingly, while the big banks have seen sharp increases in their loan loss provisions, goeasy is getting away with much better performance. In the fourth quarter, the company’s loan loss provision declined – from 7.37% to 7.28%.
Finally, the company is generating strong free cash flow, with $85 million generated in the fourth quarter, for a 29% year-over-year increase. This, along with the company’s $900 million in funding capacity, sets it up well. Given this financial and operational strength, goeasy has its sights on expansion.
Firstly, goeasy expects to grow organically in the next three years, anticipating a 65% growth rate in its loan portfolio, to nearly $6 billion in 2026. There are also three strategic initiatives that the company will pursue. The first one is the introduction of a non-prime customer credit card. Also, goeasy will continue to advance its digital mobile app. Lastly, the company is planning to invest in technology platforms to enable greater efficiency.
The bottom line
Goeasy is expecting to maintain its ROE at 21%, while increasing its operating margins and decreasing its net charge offs over time.
The risks to this outlook are plenty, however, as this company remains a high risk one. The risks to the consumer are real, and interest rates might not decline as fast as the market is expecting. This would result in negative implications for the consumer, which would likely hit goeasy’s stock price hard.
