goeasy Ltd. (TSX:GSY)
Market Cap: $3.1B
Dividend Yield: 1.6%
Rating: Buy
Projected 12-Month Return: 41%
goeasy has been one of Canada’s best growth stories the last several years.
The alternative lender has quietly built an impressive string of double digit revenue, earnings and dividend increases while posting record company numbers pretty well every quarterly earnings report.
I interviewed the former CEO and now Executive Chairman, David Ingram, in late January of 2018. Had I bought the stock then I’d be up more than 400 per cent. More impressively, goeasy’s stock has surged about 1,500 per cent since 2012, and is a 190-bagger the last 20 years.
Better late than never, because TD Securities doesn’t believe investors have missed the goeasy growth train as it’s starting analyst coverage with a “Buy” rating and a projected 12-month return for the stock of more than 40 per cent.
Here are five reasons why, along with some charts, from TD’s report that exemplify goeasy’s strong growth.
by Marcel Mclean, CFA and Mario Mendonca, CFA, CA, TD Securities
Key reasons we believe goeasy (the company prefers lower case) is an attractive investment opportunity:
1. The company is uniquely positioned within the Canadian financials space in that it is a growth company exhibiting a superior return on equity (ROE). Additionally, it was recently added to the S&P/TSX Composite Index.
GSY has demonstrated strong growth performance in terms of both top line (~13% revenue compound annual growth rate (CAGR) over the past 19 years) and bottom line (~25% adjusted earnings per share (EPS) CAGR over the past 19 years) over the long term, and has accelerated in recent years.
In the financial services sector, it is rare to find a business experiencing this rate of growth that consistently delivers ROEs in excess of 20%.
2. Additionally, the opportunity for continued growth remains strong given market dynamics and potential new verticals (specifically auto).
goeasy operates in a highly fragmented, underserved market in which it can leverage its expertise to continue to fuel organic growth as well as take advantage of inorganic opportunities.
The opportunity set in Canada alone is large with an estimated addressable market of ~$45 billion (GSY ~3% market share), not to mention potential expansion opportunities in the U.K., U.S., and possibly Australia.
The runway for growth is very strong and goeasy has proven that it is willing to pursue this opportunity, having expanded its market share by ~100 basis points (bps) in Canada (including expanding into a much larger addressable market) over the past three years.
We expect the company to continue to take share. Management has an internal target of growing EPS at a 30% CAGR over the long term. Our forecasts over the next two years call for lower growth than the 30% long term target.
We believe goeasy is still in its early stages, with significant growth potential ahead.
3. The single greatest risk to any loan-based financial company is credit risk, particularly when your target market is subprime borrowers. This risk is generally tested during periods of economic volatility.
While the most recent crisis event was unusual for many reasons (i.e. unprecedented government support, etc.), goeasy was able to actually reduce its net charge off rate by 330bps year-over-year in 2020.
It should be noted that goeasy was certainly not the only financial institution to see an improvement in its net charge-off rate during the pandemic, however, its performance does support the notion that subprime lending may not be as risky as typically perceived.
Nevertheless, it is paramount that the risk is priced right and appropriate measures to mitigate losses must be taken.
goeasy has demonstrated a high degree of competence with its proprietary custom scoring model and advanced analytical tools that utilizes its years of data and goes beyond simple credit scores.
Since 2012, charge-off rates have consistently remained in the 13%-15% range with the exception of 2020, which improved to 10.0%.
We expect the net charge-off ratio to continue to trend around this lower level going forward given the increasing proportion of rate-adjusted loans and lower-risk, secured loans and continued refinements to the credit scoring model, partially offset by a general normalization in credit conditions.
4. The company recently completed the acquisition of LendCare, which helps to diversify the loan book with a higher proportion of lower risk, near-prime loans (over 85% of LC’s loans are secured by hard assets) and expands goeasy’s capabilities and product offerings.
The change in mix as a result of this transaction is expected to reduce the company’s net charge-off ratio over time, in our view.
Furthermore, it adds capabilities in the power sports, home improvement, healthcare, and automotive loan sectors via point-of-sale relationships with ~3,000 merchants; all growth verticals that goeasy is interested in pursuing.
goeasy is now attacking auto loans from two angles – directly to the consumer and through the established dealer relationships via LendCare.
We believe that there are likely cross-sell/debt consolidation opportunities, where the customer can remain in the goeasy ecosystem for longer as more of their needs can be met by the expanded product offering.
The company should also benefit from a lower cost of funding and the scale of the combined platform.
While there is inherent risk in any acquisition, in this type of transaction the integration process is relatively short reducing that uncertainty, with the vast majority of the integration between goeasy and LendCare expected to be completed within the next few months.
While we believe goeasy can meet its stated long term growth objectives via organic means, the company is also well positioned to pursue additional deals that could accelerate growth in the near to medium term if the opportunity arises and the metrics meet management’s criteria.
5. goeasy has a strong track record of returning excess capital to shareholders.
The company has paid a dividend to shareholders for the past 17 consecutive years, never reducing the dividend, and 2021 marked the seventh consecutive year of an increase in the dividend paid per share.
This is notable because 2020 was unique in the sense that the OSFI regulated institutions (publicly traded Canadian banks and life insurance companies) were banned from announcing dividend increases and share buybacks, with the restrictions still currently in place.
- In February 2020, goeasy announced a 45% dividend increase and in February 2021 announced an additional 47% increase (bringing the dividend per share to $0.66 per quarter).
- These were reflective of management’s confidence in the strength in earnings and stability of its capital and credit levels, even during periods of heightened uncertainty.
- Following the February 2020 increase, goeasy was added to the S&P/TSX Canadian Dividend Aristocrats Index reflecting the 42% 5-year CAGR in its dividend.
- Management is targeting a 35% dividend payout ratio on EPS, which implies continued material increases over our forecast horizon.
