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The 40% drop in goeasy (OTCPK:EHMEF) share price (see chart below) over the past 6 months presented a great buying opportunity.
goeasy is trading at a P/E of 8.6, which is a 48% discount to the 5-year average P/E of 16.5. Beyond the low P/E, goeasy has a high Return on equity of 39.7% and a high profit margin of 43.2% at a very healthy current ratio of 15.3. EPS growth has not only been high at 28.1% over the past 10 years, it has also been steady, with just one year of decline (see chart below).
All figures are in Canadian dollars.
goeasy operates in two main areas: easyfinancial and easyhome. the recent acquisition of Lendcare Reports under easyfinancial business segment. easyfinancial offers installment loans for sub-prime borrowers who may not be eligible for traditional loans from major Canadian banks. Loans range from $500 to $50,000. The total return on loans average 42.1% in 2021. Due to the lower non-prime nature of the loans, the depreciation rate in 2021 was 8.8%. Lendcare specializes in financing consumer purchases such as automotive, healthcare, home improvement and powersports.
easyhome offers lease-to-own financing for home furniture, appliances and electronics for customers who may not be able to purchase it through traditional means. easyhome takes part in a smaller part of the company 18% of group sales in 2021.
2019 the company acquired shares in PayBright in a private transaction. PayBright was there acquired from Affirm and Affirm (AFRM) went public. This added an additional $16 million and $8.3 million in net income in Q4 2021 and Q4 2020, respectively. This brings adjusted diluted earnings per share to $2.76 from $2.90. On a full year basis, 2021 earnings per share were $14.62 versus adjusted $10.43. This will make 2022 look like a slower growth year as these were one-off events. There remains a performance-based number of Affirm shares that could contribute to EPS going forward, but I couldn’t find any details on when that might trigger in the Goeasy filings. Average analyst estimates for In 2022, earnings per share are $11.97. This would show a decline in EPS, but organic growth remains strong. This recent organic growth shows that growth isn’t slowing down and that the current low P/E ratio offers a compelling discount for the company.
The quarterly dividend was increased 38% to $3.64 and 444,000 shares have been repurchased and canceled since November 2021. Dividend increases over the past decade have been impressive. The chart below also shows the consistent share buybacks each year. These buybacks will continue to boost EPS in subsequent years.
In January 2022, the company reduced its fully drawn weighted average cost of debt by 0.6% from 4.8% (Q4 2020) to 4.2%. It also increased the revolving storage facility from $300 million to $900 million. This liquidity should provide funds for organic growth through Q4 2024.
Is the company ethical?
Does goeasy charge unethically high interest rates or provide a valuable service to improve the customer’s financial health? I’ll leave that answer up to the reader, but offer some pros and cons below:
- 1 in 3 customers receive a prime loan within 12 months of borrowing from easyfinancial
- 60% of customers improve their credit score within 12 months of borrowing from easyfinancial
- goeasy offers many articles to better educate customers on how to improve their financial situation
- Customers pay very high interest rates and may stay on the loan longer than the original term
- Related products such as insurance can increase the overall cost of the loan
- The BBB has a low reading of 1.2/5.0 Customer Review Rating for the company, but has an A+ rating.
goeasy does not have many direct competitors in the non-prime omnichannel lending space in Canada that are public. beautiful stone and LendDirect are both private companies, so the presentation of comparable data is not possible. Ferratum was in space though no longer offers Loans in Canada. Mogo was a smaller competitor that offered credit but has since sold his loan portfolio too easy.
Payday lenders like Money Mart, CashMoney, etc. offer a slightly different product at much higher interest rates and often for shorter periods of time. Payday loans are often for 2 weeks. Credit unions like Vancity grant credit but often for customers with better credit ratings and at lower interest rates.
In the secured loan market, easyhome competes with specialist financial card companies such as Flexiti (private) and other department store cards. Online, they compete with PayBright, but also work with him. PayBright serves as a lead generator for goeasy, but also offers other payment options such as credit card payment in installments. PayBright was acquired by Affirm in 2020. The space is evolving but there has been a lot of consolidation and goeasy is one of those consolidators.
Upstart (UPST) does not yet operate in Canada but could pose a threat in the future if they enter the Canadian market. Their machine learning models could prove to be less expensive and less risky to provide credit compared to more traditional lenders. Upstart also works with traditional banks instead of holding loans so they avoid loan write-offs.
This shrinking competitive landscape strengthens the case for goeasy as smaller competitors are removed. With fewer competitors, the assessment becomes more compelling.
goeasy stock valuation
growth at a reasonable price (GARP) investors are looking for a PEG below 1.0 to find value. If we calculate the current PEG using (PEG = P/E / EPS growth rate) we get a PEG of 0.30 (8.45 / 28%). That is far below a fair value PEG of 1.0.
As an investor, I want a 5-year total return of over 100%. To calculate the 5-year total return, I take the current adjusted earnings per share (TTM) of $10.43 and grow that using the 10-year historical earnings growth rate of 28% for 5 years. To be even more conservative, I’ll use a 20% annual EPS growth rate (see table below). Historical returns don’t always repeat themselves in the future, but due to goeasy’s consistent performance, I will use this 20% annual rate.
|year||Projected EPS growth of 20% annually|
|2026 (year 5)||$25.95|
To calculate a possible 5th year stock price, I use the 5th year EPS of $25.95 from the table above multiplied by goeasy’s 5 year average P/E of 16.4. This gives a stock price of $425.58. Based on the current price of $127.27 and a 5-year price of $425.58, the 5-year total return would be 234%. That 5-year return is well above my 100% hurdle rate.
The Bank of Canada recently increased interest rates by 0.25% to 0.50%. goeasy leverage is often linked to the Canadian Dollar Offered Rate (“CDOR”) plus a premium. goeasy uses interest rate swap contracts to generate fixed rate payments. The company also uses hedges for US dollar-denominated debt. While these hedges reduce debt volatility, they come at a price in a rising interest rate environment. This will likely increase debt costs over the next 1-5 years.
The payday loan market has seen significant regulatory changes in recent years to reduce the high cost of such loans. Depending on the province, there are additional regulatory measures that cause additional costs for goeasy. A upcoming change of the High-Cost Credit Legislation (“HCCL”) in British Columbia on May 1, 2022 may increase the cost of goeasy. More details about HCCL can be found here here.
Large Loan Book Unaudited
The company’s easyfinancial segment was very small during the 2008 financial collapse (see dark blue bars in chart below). At that time, most of the business was done in the easyhome segment. easyfinancial’s unsecured loans have yet to be tested by a major financial event, but have fared reasonably well during the recent pandemic.
The Company Projects save growth from 15-20 in 2022 and for a drop in the number to just 5 additional stores in 2024. This may indicate saturation of the physical store market or indicate a migration of credit provided online.
While there are risks, the steep P/E discount of 48% more than compensates an investor.
goeasy has a long and steady history of growth with few direct competitors in the Canadian non-prime lending market. They have been a consolidator of companies and are achieving economies of scale. Its dividend continues to grow at over 30% per year, and the company frequently conducts stock buybacks. The recent 40% fall in the share price provided an opportunity to buy goeasy in the sell-off at a 48% discount to historical P/E.