Why Goeasy Stock Rose 4.4% on Monday

Operating results out of goeasy have continued strong, and this, combined with the stock’s low valuation, is gaining investors’ interest.

| More on:
Mature financial advisor showing report to young couple for their investment

Image source: Getty Images

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.

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.

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

More on Bank Stocks

Prospects for TD Bank stock
Bank Stocks

TD Bank in Hot Water: An ‘Exceptional’ Opportunity

Is TD Bank stock a buy after its money-laundering regulatory problems?

Read more »

woman data analyze
Bank Stocks

Best Stocks to Buy in May 2024: TSX Financials Sector

Wondering which TSX financial stocks could see substantial growth in the future? Here are three stocks with BIG upside from…

Read more »

Bank sign on traditional europe building facade
Bank Stocks

2 Canadian Bank Stocks to Watch in May 2024 (They’re Not the Big 5)

Watch National Bank of Canada (TSX:NA) and another top financial closely in May.

Read more »

edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Bank Stocks

How Much Will Toronto-Dominion Bank Pay in Dividends This Year?

This long-term dividend payer could deliver double-digit returns going forward.

Read more »

Dividend Stocks

1 Dividend Stock Down 20% to Buy Right Now

Bank of Nova Scotia is a good income stock that's fairly valued and can deliver solid long-term returns.

Read more »

stock research, analyze data
Bank Stocks

Is Royal Bank of Canada Stock a Buy in 2024?

RBC (TSX:RY) stock looks strong heading into second-quarter earnings, so let's look at what's been happening with the biggest bank.

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Banking on Dividends: 2 Top TSX Bank Stocks With Attractive Yields

These two high-yield TSX bank stocks can help you earn reliable passive income for years to come.

Read more »

Bank Stocks

Is it Too Late to Buy Royal Bank of Canada Stock?

Royal Bank of Canada (TSX:RY) stock is getting hot again, but is it too late to chase this banking beast?

Read more »