goeasy: a high-risk but high-growth dividend stock (OTCMKTS: EHMEF)

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[The company reports in Canadian dollars, so the figures in this article are in CAD$ unless otherwise noted.]

easy (OTCPK: EHMEF) (TSX:TSX:GSY:CA) is Canada’s largest consumer subprime lender, founded in 1990. It aims to become a one-stop-shop for all forms of credit to unprivileged consumers. It is present in the 10 provinces of Canada.

At the end of 2021, goeasy saw growth opportunities in the province of Quebec, which is the second largest province in terms of GDP, accounting for approximately 20% of the country’s GDP and represents a large untapped market opportunity. Other areas of interest include Toronto and Vancouver, where the population density is high.

The stock had a super run during the pandemic, supported by quantitative easing at the time. Additionally, due to the quantitative easing that has occurred this year, including rising interest rates, consumers are spending less and economic growth is slowing. Consequently, the stock has been under immense pressure, falling off a cliff of nearly 45% in the past 12 months.

Chart
Data by YCharts

The dividend didn’t help remotely, as even after accounting for dividends, the stock’s total return was still -43% over the period. It’s the short-term pain that investors have to endure for the potential for long-term wealth creation.

Despite this considerable correction, the stock has still generated extraordinary total returns of 36.3% over the past 10 years – fabulous returns compared to benchmarks. iShares S&P/TSX 60 Index ETF (TSX:XIU:CA) and SPDR S&P 500 Growth ETF Portfolio (SPYG) returns of 8.3% and 13.2%, respectively, during the period. Below is a graph showing the growth of an initial investment of $10,000 in GSY stock.

Chart
Data by YCharts

It was a golden period during which the Canadian interest rate remained low and allowed the company to grow.

chart showing Bank of Canada interest rates from 2012 to 2022

Trade economy

You can compare the 2 graphs above. In particular, when interest rates were close to 0% in the period following the start of the pandemic in 2020, goeasy shares had a super rally. However, it gave back a lot of gains when interest rate hikes were planned and underway.

goeasy growth history

easy story 1990-2021

Corporate presentation

Over the decades, goeasy has found ways to grow by expanding its product range, distribution channels and geographic footprint. goeasy launched and developed its easyhome and easyfinancial brands across the country from approximately 2000 to 2020.

From 2011 to 2021, it grew its adjusted earnings per share (“EPS”) at a compound annual growth rate of 29.1%. Its next stage of growth comes from a continued expansion of products, channels and geography, complemented by mergers and acquisitions.

For example, in April 2021, goeasy acquired LendCare for $320 million. He partially funded the acquisition with a bought deal offering of $172.5 million of subscription receipts at $122.85 per subscription receipt, which was a fair multiple of approximately 11.8 times earnings. adjusted from 2021.

In a related press release, Jason Mullins, President and CEO of goeasy, said: “By expanding our near-premium product line and adding new verticals to our point-of-sale lending channel, we accelerating our growth and expanding our addressable share of the $200 billion secondary consumer credit market. »

Here’s a quick look at its summary financials, which showed double revenue, triple operating profit and 5.7x diluted EPS during the period, as well as strong return on equity ( “ROE”). An expansion of the operating margin contributed to its growing profitability. It plans to further increase its operating margin steadily to 37%+ by 2024.

goeasy financial report 2017 to 2021

Annual report 2021

goeasy’s five-year adjusted ROE is 24.8%. Its ROE actually increased in 2020, helped by the lower cost of revenue, as there was an abundance of money supply at the time, such as subsidies from government programs during the pandemic.

Recent results

In the first half of the year, goeasy posted record revenue of $434 million, up 30% year-over-year. Additionally, operating profit jumped 38% to $165 million. Adjusted net earnings increased 15% to $92.6 million and 12% per share. (Adjusted earnings have been adjusted for the acquisition of LendCare, business development costs and the fair value to market impact of investments.)

Watch for goeasy’s third quarter results to be released after market close on November 10th as well as the earnings call on November 11th.

Evaluation

At less than $110 per share, the growth stock trades at about 9.8 times its combined earnings, or about a 20% discount to its normal long-term valuation.

chart showing goeasy stock is undervalued

QUICK charts

Some analysts think the stock is even cheaper than that. According to 9 analysts, goeasy stock has a 12-month average price target of $199.20, which is a gigantic reduction of 45% that could translate into a near-term price appreciation of 81%.

goeasy also earns a “Strong Buy” rating from SA Authors and a “Buy” rating from Wall Street. I’ll be adding my “Buy” rating to the mix soon. I hesitate to recommend it as a strong buy due to the current unfavorable macroeconomic environment (quantitative tightening and rising interest rates).

SA and Wall St ratings on goeasy stock

Looking for Alpha

Dividend

goeasy has paid an increasing dividend every year since 2015. Its 5, 10 and 15 year dividend growth rates are 39.5%, 22.7% and 17.3% respectively. Its payout ratio is estimated to be around 32% of adjusted earnings this year. The dividend-paying stock offers a yield of around 3.3%.

Risks

If goeasy is a great value and a long-term winner, why aren’t more investors piling into the stock right now? Every action carries risks.

High risk customers

goeasy targets high-risk customers. These are non-preferred customers who are unable to borrow through traditional means. So they end up using goeasy’s products and services and paying higher interest rates to goeasy.

For example, its target net charge rate for 2022 and 2023 is 8.5% to 10.5%. That said, goeasy also aims to help its customers improve their financial situation.

In our direct lending channels, our team…takes the time to walk our clients through their credit history to help them better understand the steps to take to improve their credit score…Progressively offering our clients lower interest rates for late payments…we aim to help our customers reduce their cost of borrowing and get them back on the path to obtaining credit from a traditional bank. — Annual Report 2021

In addition, goeasy carefully screens its customers. It took more than a decade to develop and refine its models, which are “statistically 2x more predictive in projecting risk of loss than a generic credit score.”

Systematic risks

As mentioned earlier, quantitative tightening and rising interest rates are driving down the valuation of goeasy shares. But this is happening across the stock market, especially for growth stocks that had high multiples before, which is why growth stocks have generally seen the biggest price declines in this market downturn.

Recessions can also lead to a huge sell-off in securities. Many economists, including a report by Royal Bank of Canada (RY)(TSX:RY:CA), predict that a recession will occur in Canada as early as the first quarter of 2023.

However, perhaps due to improvements in its underwriting process over the past 10 years, during the pandemic recession, it did not experience a dramatic reduction in adjusted earnings as it did during the recession of the global financial crisis.

graph showing how goeasy fared in the last 2 recessions

FAST charts with author annotation

Key takeaway for investors

A percentage of the Canadian population will always be non-priority and will need goeasy’s products and services. As goeasy continues to expand its products, channels and geographic presence, it is expected to maintain above-average growth.

goeasy is a higher risk but higher growth dividend stock that pays a decent dividend yield of 3.3% with a 15-year dividend growth rate of 17.3%. Its S&P credit rating of BB- is below investment grade. The undervalued stock could be a great addition to a diversified stock portfolio to help accelerate growth while providing a nice and safe dividend.

Assuming an adjusted EPS growth rate of 15% and P/E expansion at its normal long-term P/E, the stock can generate annualized returns of approximately 22.8% over the next five years . If it materialized, it could double investors’ money in about 3 years and 2 months.


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