Expansion Into Secured Lending May Improve Credit Mix And Lower Risk

Key Takeaways

• Strong loan portfolio growth and secured lending expansion improve market share and credit mix, driving future revenue and margin growth.
  
• Capital raise boosts growth funding, while economic conditions and credit standards may enhance loan opportunities and revenue.
  
• Leadership changes, rising delinquency rates, regulatory interest rate caps, and economic headwinds may challenge goeasy's earnings stability and revenue growth.

Catalysts

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

• Record loan originations and strong growth in the loan portfolio indicate goeasy is capturing increased market share, which should drive future revenue growth.
  
• Expansion in secured lending products, particularly home equity and automotive financing, improves the credit mix and lowers risk, potentially enhancing net margins through reduced credit losses.
  
• Continued utilization of operating leverage and productivity improvements resulting in a lowered efficiency ratio may bolster future net margins by reducing expenses as a percentage of revenue.
  
• The capital raise through senior unsecured notes provides significant funding capacity for ambitious growth plans, supporting revenue and earnings growth by enabling continued loan portfolio expansion.
  
• Anticipated economic improvements and potential loosening of credit standards could further catalyze revenue growth, as the company might capture more loan opportunities when conditions stabilize.

goeasy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming goeasy's revenue will grow by 38.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 35.3% today to 20.6% in 3 years time.
• Analysts expect earnings to reach CA$437.5 million (and earnings per share of CA$24.44) by about January 2028, up from CA$283.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.5x on those 2028 earnings, up from 10.2x today. This future PE is lower than the current PE for the CA Consumer Finance industry at 11.9x.
• Analysts expect the number of shares outstanding to grow by 2.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.89%, as per the Simply Wall St company report.

goeasy Future Earnings Per Share Growth

Risks

• The transition of Jason Mullins, the current CEO, out of his role at year-end might lead to leadership uncertainty, affecting the company's strategic direction and financial performance, particularly impacting earnings stability.
  
• An increase in delinquency rates in the loan portfolio, especially in the secured loan segment, could pose risks to net margins and ultimately earnings if it results in higher charge-offs than anticipated.
  
• Regulatory changes, such as the implementation of a 35% interest rate cap, may negatively impact revenue growth by limiting the company's ability to price lending products effectively.
  
• Rising interest rates up until recently and the company's reliance on senior unsecured notes to fund growth might elevate borrowing costs, putting pressure on net margins and earnings.
  
• Economic headwinds, such as a weaker macroeconomic environment and persistent high inflation, could lead to an increase in delinquencies, affecting revenue and credit costs, which could, in turn, reduce net earnings.

Valuation

• The analysts have a consensus price target of CA$235.56 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$207.0.
  
• 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$437.5 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of CA$173.93, the analyst's price target of CA$235.56 is 26.2% 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.