Is goeasy Ltd. The Best Value in Canada?

I’ve owned goeasy Ltd. (TSX:GSY) for a long time now, at least through family members’ accounts I manage. I intend to inherit that money some day, so I manage it just like I would my own capital.

It’s been an excellent performer in that portfolio, even after sliding lately. Here’s why I think y’all should consider it as well.

Intro

I first discovered the company years ago, right as it was beginning the transformation into the organization we know today. Back then, goeasy was primarily a furniture/electronics retailer who was known for its instore financing.

The world was a little different back then. You know when you go into The Brick or Leons how they have all sorts of financing options? Through its Easyhome subsidiary, goeasy was essentially the first to offer that service. But instead of using a third party or immediately selling the debt to someone else, goeasy kept it in house, just in a different subsidiary of the same company. It was an intriguing setup, and it was something I paid attention to off and on over the next couple years.

The company delivered excellent growth using that model for a number of years before making a strategic decision to go further into the alternate financing space. After some internal issues (which included a big chunk of the board resigning in 2011 and restating of financial statements), goeasy went full steam ahead into the finance space.

Goeasy really started to get serious about the alternative financing game in 2014 when it announced it was going to acquire the corpse of The Cash Store from bankruptcy. It closed the transaction of 47 former Cash Store locations in early 2015, immediately slapping Easy Financial logos on those storefronts and getting into business offering its patented not quite a payday loan but certainly not great loans. Or at least that’s what I call them.

(Aside: there was a Cash Store in the small Alberta town where I grew up and lived at the time. I ran into the manager one day circa 2011 or so and asked him about the business. It turns out he was bonused on loan growth, so he’d fudge applications in such a way the algorithm would automatically approve them. Local dirtbags [who had no intention of repaying] loved the guy. Naturally, it all eventually blew up.)

Now’s a good time to talk about the loan product goeasy came up with back then, something that essentially replaced payday loans in Canada. It’s an unsecured loan, for up to $10,000, with an interest rate of approximately 50% per year. Additionally, the company sells certain addons, things like insurance if you lose your job. These come at a cost, of course.

Many people immediately clutch their pearls and need the fainting count once they see the terms and conditions of the flagship loan product, but it was a hit. Growth — which was already pretty solid — turned a corner and started rocketing higher. Revenue increased from just over $64M in 2014 to $101M in 2015 to $139M in 2016. And those growth rates really haven’t stopped, either. GSY’s revenue in the last twelve months — 2022’s results aren’t out yet — was $662M.

Here’s the last decade of revenue growth in graph form, and it doesn’t even include 2022. Up and to the right, anyone?

Like I said, goeasy essentially replaced payday loans in Canada, and it had the smarts to launch this product right as various provincial governments were slapping restrictive measures on the payday loan industry. And to a large degree, it’s worked well for everyone. Consumers get access to a cheaper loan and restrictions have essentially wiped out traditional payday loans.

50% annual interest doesn’t necessarily look like a good deal on the surface, but let’s compare two loans for a second:

Payday loan: $1,000 times 25% every two week times 12 weeks = $3,814.70 owning after 3 monthsGoeasy loan: $1,000 times 12.5% = $1,250 owning after three months

Payday loans have to be repaid fully by your next pay cheque. Goeasy would give a borrower months to repay fully, which wouldn’t take such a huge bite of their cash flow.

Once the company established it had a winning product, it stomped the gas pedal and focused on growth. It launched an online loan origination service. It tapped the capital markets for financing. It expanded into other products like car loans and second mortgages. It started selling some of its loan origination expertise to other lenders, too.

And, perhaps more importantly, it survived the pandemic with barely a hiccup, proving that individually these loans may be risky but a portfolio of them takes away much of that risk. I’m not saying GSY is risk free (more on that later), but its consistent results over the last five plus years has been an encouraging sign.

I’ve already shared the growth in revenue, so I might as well share the growth in earnings. Here’s GSY’s earnings per share over the last decade.

The business today

Despite nothing but consistently great results for a decade between 2011 and 2021, goeasy shares haven’t performed well over the last 52 weeks. The stock is down about a third over the last year, and some 40% off all-time highs set early in 2022.

Recession fears have hit the stock hard, of course. Naysayers argue the company hasn’t gone through a real recession ever since it pivoted away from furniture financing. That could hit them like a ton of bricks. Increased interest rates haven’t helped, either.

Like most financial institutions, goeasy borrows a big chunk of their loan origination dollars. Goeasy is especially susceptible to increased borrowing because it has grown so quickly. Naturally, investors started to panic a little bit as rates rose. It has some room to pass on rate increases to customers, but remember its 50% loan product is somewhat close to the legal limit in interest charged, which is currently a hair under 60%.

The market is also worried growth rates will slow. Analysts still project 24% growth in loan originations in 2022 — a fairly safe assumption, since the year is almost over and it only has one more quarter to report — and then slow somewhat to 20% growth in 2023 and 15% growth in 2024.

Earnings have also taken a bit of a hit in 2022 as charge-off rates have increased compared to the last couple years. After spending most of 2021 in the 8-8.5% range, loan write-offs are approximately 9.5%. The increase is a little troubling and the trend is heading higher, but it’s still in the 8.5-10.5% range the company targets. Additionally, it’s well below 2019’s levels, which were in the 12-13% range. The acquisition of LendCare, which closed in 2021, has also impacted earnings as it is integrated into the organization.

Here’s some more info on charge offs and net loan losses from the company’s latest investor presentation.

Risks today

The company is taking steps to reduce its risk. The share of secured loans has increased from just over 33% of the portfolio to almost 38%. Changes have been made to the lending algorithm too, which are supposed to filter out more risky borrowers. I’m not sure how much of this is just window dressing, but it is nice to see management at least acknowledging the risks the market feels.

Another risk is the balance sheet. Goeasy has, essentially, been built on debt, and the market worries about that. Current assets are approximately $3.1B, with about $2.4B invested in the loan portfolio. Total debt is just over $2.1B. There’s not a huge amount of wiggle room there, and these concerns are likely why the company just recently completed a $58M share issuance.

But there’s also a catch-22 situation here. How is it supposed to grow if it doesn’t take on debt? Additionally, if you look at the debt-to-loan portfolio value as a percentage, it’s been fairly consistent for years now. From an operating perspective, goeasy has proven it gets less risky as it continues to understand its borrowers better. A big recession could throw this all out of whack, of course. But the bottom line is the company has proven the amount of debt it carries isn’t excessive.

A quick note on increasing interest rates, which is obviously a factor. But keep in mind goeasy was paying 5%+ on debt when the rest of the world was paying 1-2%. It’s used to higher interest rates.

Another risk is just the general one the company eventually gets legislated out of existence. Just like what happened with payday loans. Although I think the risk of that is quite small, it’s still a risk. The same folks who harped against payday loans have goeasy square in their crosshairs. But what’s the alternative? There’s a reason why this product exists, and look at the size of the business. There’s a good market of folks who just can’t get financing from traditional sources. Are we just supposed to cut them off?

Why I’m bullish

The main reason I’m bullish is goeasy is probably the cheapest growth stock on the TSX today, and perhaps even in North America as well.

TTM earnings are just shy of $10 per share, a figure deflated by slightly higher loan losses and charges related to the LendCare acquisition. The stock is at $107 as I write this. That puts it at about 11x trailing earnings.

But the stock really gets cheap when you look at forward earnings. Analysts project the company will earn $13.89 in 2023 and $16.92 per share in 2024. Normalized earnings expectations are slightly higher, but let’s go with the slightly lower estimates. That puts shares at just 7.7 times 2023 and 6.3 times 2024’s expected earnings.

The bottom line is expected to grow at more than 20% per year over the next couple years, and that’s only worth single digit earnings multiples?

Say goeasy is only worth a maximum of 11x trailing earnings. 11 times $17 in 2024 earnings puts the stock at $187 in early 2025. That’s 80% upside from here in approximately two years.

Goeasy also puts up excellent underlying metrics compared to other financials. Return on equity has been consistently in the 25% range, compared to the mid-teens for even the best Canadian bank. Operating margins are close to 50%. Net margins are in the 40% range.

Next, let’s talk about the dividend. The current payout is $0.91 per quarter, good enough for a 3.4% yield. Dividend growth has largely followed earnings growth, giving us this delightful graph:

If I ran goeasy I’d go a little gentle on the next dividend increase, rather than increasing full amount. I’d increase the payout about 10%, upping the current $0.91 dividend to an even $1.00 per share each quarter. While that’s a big step back from what investors got last year (the dividend increased from $2.64 to $3.64 per share in 2022), it’s still solid growth while giving the company a little bit more wiggle room to pay down some debt.

A $4 per share dividend would be a 3.7% yield today. We shouldn’t have to wait long for the increase to be announced, either. It’ll come with full-year earnings, which are slated to be released in mid-February.

I think it’s more likely goeasy is a little more aggressive in their next dividend increase as a way of telling the market they’re bullish on 2023 and 2024. If they increase to the $4.50 per share range that gives us a yield north of 4% on the current share price.

Who says you can’t get decent yield from growth stocks?

If dividend growth matches earnings growth, all of a sudden you end up with a pretty solid income stream from your original investment. A 20% CAGR on dividends gives us a projected payout of $7.55 five years from now. Yield on cost (which I usually hate, but bear with me here) would be a hair over 7% in 2027. Again, that’s making some generous assumptions here, but I can easily envision a world where goeasy increases the bottom line by 20% per year for the next five years.

Goeasy has barely cracked the subprime lending market in Canada, despite a decade of terrific growth. The company sees its current addressable market at something like $45B. It has a loan book currently a little more than $2B. Growth could continue for a very long time.

The bottom line

Sure, goeasy has warts. And I understand why certain investors will wash their hands of this name and never want to hear about it again, lest a subprime lender puts them into some sort of moral outrage.

I’m bullish because goeasy is a good business with excellent growth potential trading at a value price. Potential dividend growth is just a bonus. 2,000+ words later and that’s really what this analysis comes down to.

I wouldn’t make goeasy 10% of my portfolio or anything like that, although I’d be loathe to make most anything 10% of my portfolio. It has a non-zero chance of blowing up. But that chance is remote at best.

Disclosure: author is long goeasy via portfolios he manages for immediate family members