The global equity markets have turned volatile amid the fear of recession. The S&P/TSX Composite Index is down around 3% this month. Despite the pullback, the index trades 6.9% higher for this year. Meanwhile, goeasy (TSX:GSY), a subprime lender, has outperformed the broader equity markets with year-to-date returns of around 19%. Its impressive quarterly performances and high growth prospects have increased its stock price.
Despite the recent increase in its stock price, the company trades around 10% lower than its 52-week high. So, let’s assess whether goeasy is a buy at these levels by looking at its second-quarter performance and growth prospects.
goeasy’s second-quarter performance
goeasy generated $827 million of loan origination during the second quarter, representing a 24% increase from the prior year’s quarter. Rising credit demand and solid performances across its product range and acquisition channels led to higher loan originations. Supported by higher loan originations, the company ended the quarter with a loan portfolio of $4.14 billion, representing a 29% year-over-year growth.
The company witnessed a stable credit and payment performance during the quarter, with its annualized net charge-off rate at 9.3% — within management’s 8-10% guidance. Its allowance for future credit losses fell from 7.38% to 7.31%. Its efficiency ratio, a measure of non-interest expenses to revenue, fell 430 basis points to 26.9%.
Amid these solid operating performances, goeasy’s top line grew 24.7% to $377.8 million. Its adjusted operating income rose 34% to $153 million, while its adjusted operating margin expanded by 2.8% to 40.5%. Further, its adjusted EPS (earnings per share) stood at $4.10, representing a 25% increase from the previous year’s quarter. Now, let’s look at its growth prospects.
goeasy’s growth prospects
Although goeasy has consistently performed over the last two decades, it has acquired just around 2% of the $218 billion Canadian subprime market. So, it has substantial scope for expansion. The Bank of Canada has slashed its benchmark interest rates twice this year. Investors are hopeful of one more interest rate cut this year. Falling interest rates could boost economic activities, thus driving credit demand.
Given its expanded product offerings, strong delivery channels, and strengthening of digital infrastructure, goeasy is well-positioned to grow its market share. The company has taken strategic initiatives to strengthen its footprint in subprime auto financing, retail, home, and healthcare verticals. Moreover, the company has adopted next-gen credit models and implemented tighter underwriting requirements for its customers, which could lower defaults and reduce its business risks. It has also strengthened its balance sheet by raising US$200 million by issuing senior unsecured loans. So, its growth prospects look healthy.
Meanwhile, after posting impressive second-quarter performance, goeasy’s management has raised its three-year guidance. The management expects its loan portfolio to reach $6.2 billion by the end of 2026, representing a 50% increase from its current levels. Its operating margin could increase to 42% by 2026 while delivering an annual return on equity of over 21% through 2026.
Investors’ takeaway
Although goeasy has delivered healthy returns this year, it still trades at an attractive valuation, with its NTM (next-12-month) price-to-sales and NTM price-to-earnings multiples at 1.9 and 9.8, respectively. Further, it has rewarded its shareholders by raising its dividends at an annualized rate of over 30% for the last 10 years, while its forward yield stands at 2.52%. Considering all these factors, I believe goeasy would be an excellent buy at these levels.
