There is a saying by Bruce Lee, “Long-term consistency beats short-term intensity.” It holds true for goeasy (TSX:GSY), a lender that gives loans from $500 to $100,000 for 1 to 10 years to non-prime individuals who have been denied loans by traditional banks. Canadian bank stocks didn’t grow as fast as goeasy did in the last three (63%), five (265%), and 10 years (789%). Had you invested $10,000 in goeasy in January 2014, the investment would now be worth $88,522. And this excludes the dividend goeasy has been paying all these years.
What is driving this growth? Can it replicate this growth in the next 3, 5, and 10 years? Past performance does not guarantee future returns. However, it generates confidence in the company’s business model and effective implementation.
What is driving goeasy’s growth?
goeasy earns revenue from the loan interest and processing fees it charges on loans. The more loans it gives, the higher revenue it earns. It also bears the risk of default by customers. However, it tries to balance out risk by carefully profiling customers and encouraging them to make timely payments to improve their credit scores.
As customers repay their loans, goeasy’s loan receivables increase. It then reinvests this money by giving more loans. Think of it this way, you lend $10,000 to a person at 34.5% interest for two years. You get interest plus the loan amount back in two years, assuming 10% of the amount was defaulted. You still have $90,000 in capital you can lend again at 34.5% interest. The money keeps circulating, and income keeps growing. You retain some income for lending and distribute some as dividends. That is how goeasy increases its profits.
goeasy has adopted a four-pronged approach to drive revenue growth:
- Develop a wide range of credit products – auto finance, home finance, personal loans, and point-of-sale (POS) loans.
- Expand distribution channels – merchant locations, standalone branches, and omnichannel networks.
- Diversify the geographic footprint.
- Improve customers’ financial wellness through products, pricing, and ancillary tools and services.
This strategy has helped goeasy grow its revenue at a compound annual growth rate (CAGR) of 17.7% and earnings per share at 29.5% over the last 10 years.
Expectations for goeasy in the next three years
goeasy expects to grow its loans receivable at an 11.8% CAGR to $4.9 billion by 2025. It expects to earn revenue of $1.6 billion in 2025 from $1.2 billion in 2023. The lender is optimizing its expenses by improving customer credit scores. If more and more customers make timely payments, its net charge-off rate (bad debt) will decline, and operating profit margins will improve.
Working along these lines, goeasy is targeting reducing its charge-off rate from 8-10% in 2023 to 7.5%-9.5% by 2025. If it achieves its charge-off target, it can improve its profit margin to over 38% by 2025 from 36% in 2023. Improving profit margins and consistent revenue growth could drive goeasy stock prices for the next three years.
Expectations for goeasy in the next 5 to 10 years
Over the longer term, goeasy plans to shift its non-prime consumers to prime consumers and offer them bank loans. The company is growing at a gradual pace while maintaining its profit margins.
Canada has a large population of non-prime individuals. goeasy is cautiously expanding its product portfolio and distribution channel. It has just touched the tip of the iceberg. There is a significant market for goeasy to tap. The increasing revenue and earnings will continue to grow goeasy’s stock price in the long term.
How to invest in this growth stock
goeasy is a stock to buy at every dip. The stock is still trading 26% below its all-time high of $217 it reached in 2021. The stock fell in the last two years over fears of rising interest rates. But that did not affect goeasy’s loan origination and charge-off rate.
Now that the market expects interest rates to fall, goeasy stock has begun its recovery rally. It has surged 40% since November 2023 and has the potential to reach its high of $217 in the next two years. It is a good time to buy the stock and add more shares of goeasy at any dip.
You can also consider buying two shares of goeasy every month, accumulating a significant number of shares over time. Regular investing in such volatile stocks can help you reduce your overall cost per share through dollar cost averaging. And long-term growth can help you generate wealth in 10 years.
