goeasy (TSX:GSY) has dipped considerably, losing roughly 25% of its value since hitting an all-time high last year.
Investors are worried about rising interest rates and the impact on goeasy’s growth going forward. But perhaps these worries are already priced in. Here’s a closer look.
goeasy’s business model
goeasy has carved a niche for itself as a specialty finance company offering loans to customers through easyhome, easyfinancial, and LendCare. The company also offers lease-to-own services like auto loans and home equity loans. In other words, it’s an alternative lender.
These alternative lenders have filled the gaps left by major banks in Canada’s economy. By targeting newcomers, younger borrowers, and people with a lacklustre credit history, goeasy has captured a segment of the market that could be lucrative if risks are managed appropriately.
The company’s outperformance stems from investors taking note of how the underlying core business has continued to deliver. Revenue and profitability have grown by a double-digit rate over the few years.
In the most recent quarter, goeasy’s loan portfolio grew by 60% to $1.90 billion, with adjusted earnings increasing 48% to $6.7 billion. Earnings per share increased 35% to highs of $2.70.
Dividend prospects
Higher loan volumes, product expansion, and omnichannel offerings compounded by strategic acquisitions are some of the factors that drive goeasy’s revenue projections. The team expects to sustain its current double-digit growth rate going forward. Consequently, the top line is expected to experience tremendous growth, as Canada adds more immigrants and demand for alternative lenders increases.
Robust revenue growth has allowed goeasy to generate sufficient free cash flow to reward investors through dividends. The company’s dividend yield currently stands at 1.66%. That’s lower than average, but the payout ratio is just 16.3%, which means there’s plenty of room to expand. If revenue and profit forecasts are met, the team should have no trouble raising this dividend payout in the years ahead.
Meanwhile, goeasy stock trades like a deep-value opportunity, despite these growth expectations.
Valuation
After the recent correction, goeasy’s price-to-sales ratio is down to 3.7. Additionally, the stock is trading at a discount with a price to earnings of 11. That implies an earnings yield of 9%. It also implies that the market hasn’t priced in growth opportunities.
When you adjust the P/E ratio for growth, the PEG ratio works out to 0.31. Even if goeasy’s growth slows down to 10%, the PEG ratio would be around one. In other words, the stock’s current valuation is based on a hypothetical worst-case scenario. There could be limited downside risk from these levels.
Bottom line
Alternative lenders like goeasy are risky. In an environment where interest rates their customers could be more prone to default than those of traditional banks. However, goeasy has a track record of managing this risk appropriately. Meanwhile, its stock is trading based on the worst-case scenario. That would make it an ideal bet for a contrarian investor with an appetite for risk.
