Rob Daly goeasy (TSX: GSY:CA) is Canada’s largest installment loan provider with a sizable and expanding customer base. The stock has been a significant long-term winner, especially since 2018 when earnings growth accelerated. The equity trades at a very reasonable PE ratio with robust revenue growth and margin expansion over time.
Recently, the stock has experienced some volatility as the Canadian government cracked down on the previous 48% criminal interest rate cap in Canada. That number was lowered in the 2023 budget to 35% interest per year – a move GSY had been preparing for over several years. They have increased their asset-backed portion of their portfolio and have reduced lending to riskier borrowers ahead of the change.
The stock came under some pressure recently as some feared further crackdowns on the subprime lending space due to a cost of living crisis in Canada. However, those fears have largely been proven unfounded, and the stock has since recovered.
Let’s examine what the budget entailed.
2024 Budget – Danger Averted
The 2024 Canadian budget outlined the fiscal plan for Canada as well as changes aimed at making life more affordable for Canadians. One of those was a crackdown on predatory lending practices with a focus on the cost of living and the debt cycle that some people find themselves trapped in. This is most evident in the payday loan and installment loan sectors, which were impacted by the new budget changes listed below.
[Image of 2024 Canadian Budget, Page 161 (Government of Canada Website)]
Some portions of the above could pose a small amount of risk to goeasy as they do offer optional insurance products for their loans. However, as it stands now, it is unclear what these changes mean and whether the provinces will implement changes at their level.
The other changes are mostly targeted at payday loans, which are goeasy’s primary competition. Goeasy offers a longer-term solution to help build credit and break the cycle of payday loans. Therefore, I see this budget update as a net positive for GSY shares overall as demand remains strong and no significant concerns are raised regarding their current loan yields.
Moreover, as smaller competitors are squeezed by advertising restrictions, goeasy will benefit from its extensive point of sale and online presence. They have highlighted this in the quarters since the 2023 budget changes, as the high cost of capital is putting pressure on smaller competitors.
Additionally, with the federal election just a year and a half away, it is unlikely that we will see further rate decreases before a projected Conservative party victory. While this is not guaranteed, the Liberal government understands that excessively low rates could hinder some Canadians with poor credit from obtaining loans.
Thus, the risk of taking further action on rates appears to be balanced by certain pressures on the payday loan sector.
Data by YCharts
Fundamentals – No Change
The fundamentals have remained unchanged since my last article on goeasy in October 2023. As you can see above, both operating income and revenue are growing at a rapid pace, with efficiency improving and revenue growing 23.7% year-over-year.
They continue to execute on their roadmap with increasing volumes of auto loans and secured loans, lowering their overall risk profile. Due to the importance of cars, especially in Canada, the automotive financing sector has experienced record originations. This led GSY to increase its securitization facility for automotive to $500 million to support further growth in 2024 and beyond.
Originations still grew 12% year-over-year in Q4, with the quarterly charge-off rate decreasing to just 8.8%. This demonstrates that the company continues to expand its loan base with a lower risk profile than in previous years. The average weighted interest rate for Q4 was just 30.5%, well below the new cap of 35%.
The operating margin is expected to continue improving, from 38.1% in 2023 to a guided 39% in 2024. Another strong positive for the business is that loans are increasing for both existing and new customers.
New customer growth was up 15% in Q4 with applications up 30%, reflecting management’s prudence in focusing only on those with a strong risk-reward proposition. This type of management has led to the significant decrease in charge-off rates over the past several years.
To top it all off, the company continues to increase its dividend, which will be $4.68 per share for 2024, a substantial 22% increase from 2023. This represents a solid 2.7% yield, even though the stock has performed well over the past six months in line with the broader market.
Conclusion – Buy Rating Maintained
goeasy remains the top financial stock of choice in Canada with strong growth, a growing dividend, and significant runway for earnings improvement. The company continues to invest in its new initiatives, and the overhang of regulatory changes should be greatly reduced for the next 12 months.
The stock will likely always trade at a slight discount to where it should due to regulatory concerns, but the gains speak for themselves, and long-term investors would be wise to hold GSY shares. While it isn’t a strong buy like it was between $100-$120 CAD, the shares are still a buy here with 21% expected earnings growth in 2024 at just 12x trailing earnings.
Editor’s Note:
This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
Analyst’s Disclosure:
I/we have a beneficial long position in the shares of GSY:CA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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