goeasy (TSX:GSY) offers a wide range of financial services to non-prime customers through the easyhome, easyfinancial, and LendCare brands. The company has been under pressure over the last six months, losing around 19% of its stock value compared to its July highs. The fear of delinquencies amid a challenging macro environment and a transition in leadership with Jason Mullins stepping down from the President and CEO position has made investors nervous, leading to a pullback. Amid the correction, let’s assess its third-quarter performance and growth prospects to determine buying opportunities in the stock.
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goeasy’s Q3 performance
In the recently reported third-quarter earnings, goeasy generated $839 million of loan originations, representing a 16% increase from the previous year’s quarter. The increased demand for credit and solid performances across its products and acquisition channels boosted its loan originations, thus expanding its loan portfolio. The company’s loan portfolio stood at $4.4 billion at the end of the third quarter, representing a year-over-year increase of 28%. Boosted by the expanding loan portfolio, its topline grew by 19% to $383 million.
The company witnessed stable credit and payment performance amid enhancements to its credit models and underwriting practices and an increase in secured loans, which stood at 45% at the end of the third quarter. Its annualized net charge-off rate increased from 8.8% in the previous year’s quarter to 9.2%. However, it was within the company’s guidance of 8.8%–9.8%. Also, the subprime lender’s allowance for credit losses increased slightly from 7.3% to 7.4%.
Driven by topline growth and improving operating metrics, goeasy’s operating profits grew by 26% to $160 million. However, its adjusted operating income grew by 25% to $163 million, while its adjusted operating margin improved from 40.4% to 42.6%. Also, its efficiency ratio, which measures its profitability and cost-efficiency, improved by 550 basis points from 28.6% to 23.1%. A lower efficiency ratio is better as it indicates that the company is spending less to generate each dollar of income.
goeasy also generated an adjusted net income of $75.1 million, while its adjusted EPS (earnings per share) stood at $4.32, representing a 13% year-over-year increase. Meanwhile, its adjusted return on equity stood at 25.7%, a decline from 26.6% in the previous year’s quarter. Now, let’s look at its growth prospects.
goeasy’s growth prospects
Despite the strong growth over the last few decades, goeasy has acquired just around 2% of the $218 billion Canadian subprime market. So, it has considerable scope for expansion. Besides, falling interest rates could boost economic activities, thus driving credit demand. Given its comprehensive product range, solid distribution network, and geographical expansion, the lender is well-equipped to expand its loan portfolio. The company has also strengthened its funding capacity by raising around $700 million through senior unsecured notes.
Further, goeasy is tightening its underwriting requirements and implementing next-generation credit models, which could lower its delinquencies and boost profitability. Meanwhile, management has provided an impressive three-year guidance, with the midpoint of its loan portfolio guidance representing a 41.2% increase from its current levels. Amid the expansion of its loan portfolio, revenues could grow at an annualized rate of 14% through 2026 while increasing its operating margin to 42% by 2026. So, I believe the company’s growth prospects look healthy.
Investors’ takeaway
Amid the recent correction, goeasy’s valuation has declined to attractive levels, with its NTM (next 12 months) price-to-sales and NTM price-to-earnings multiples at 1.6 and 8.7, respectively. Besides, the company has rewarded its shareholders by paying dividends for the previous 20 years. It has also raised its dividends for the last 10 years and currently offers a healthy forward yield of 2.8%.
Considering all these factors, I believe investors should look to accumulate the stock to reap higher returns in the long run.
