AI Integration And Product Expansion Will Strengthen Position In Consumer Finance Market

Key Takeaways

• Expansion in loan products and automotive financing is expected to drive revenue growth through new customer segments and dealer networks.
  
• Investment in technology and share repurchases indicate confidence in efficiency, productivity, and future cash flow, supporting improved net margins and EPS growth.
  
• Macroeconomic challenges and regulatory changes may pressure goeasy's growth, revenue, and earnings due to loan loss provisions, rate caps, and competition.

Catalysts

Provides non-prime leasing and lending services under the easyhome, easyfinancial, and LendCare brands to consumers in Canada.

• The addition of new and differentiated loan products, such as a revolving credit card and auto title and refinance loans, is expected to increase product offerings and reach new customer segments, driving revenue growth.
  
• Expansion in the automotive financing segment, with an increase in dealer networks and originations, suggests sustained growth and higher revenue potential as this segment is a key driver of overall portfolio expansion.
  
• Technological investments to enhance operational efficiency and integrate AI to streamline processes are likely to lead to improved productivity, positively affecting net margins through cost reductions.
  
• The company’s historical ability to pass along interest cost savings to customers and manage credit risk proactively suggests stable credit performance, potentially supporting stronger net income through lower charge-off rates.
  
• Ongoing share repurchases and a 25% increase in annual dividends indicate confidence in future cash flow generation, which is anticipated to support earnings per share (EPS) growth.

goeasy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming goeasy's revenue will grow by 38.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 34.8% today to 21.1% in 3 years time.
• Analysts expect earnings to reach CA$452.9 million (and earnings per share of CA$26.58) by about March 2028, up from CA$283.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.0x on those 2028 earnings, up from 8.5x today. This future PE is lower than the current PE for the CA Consumer Finance industry at 25.3x.
• Analysts expect the number of shares outstanding to decline by 1.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.18%, as per the Simply Wall St company report.

goeasy Future Earnings Per Share Growth

Risks

• The company is facing challenges with loan loss provisions due to unfavorable changes in macroeconomic indicators, including rising unemployment and GDP pressures, which may impact net margins negatively.
  
• Delays in repossession and collection processes, particularly with auto loans, could lead to an increase in delinquency rates and impair future earnings.
  
• The implementation of a rate cap will likely reduce the portfolio yield, possibly affecting overall revenue generation in the long term.
  
• Tightening credit criteria amidst economic uncertainty could slow down loan growth, impacting future revenue and market share.
  
• Increasing competition and potential dislocations in the market due to regulatory changes might pressure the company's traditional growth avenues, possibly affecting revenues and growth prospects.

Valuation

• The analysts have a consensus price target of CA$239.111 for goeasy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$300.0, and the most bearish reporting a price target of just CA$200.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$2.1 billion, earnings will come to CA$452.9 million, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 8.2%.
• Given the current share price of CA$147.76, the analyst price target of CA$239.11 is 38.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.