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Canadian Lender Goeasy  Could Easily Continue its Growth
Stock Analysis & Ideas

Canadian Lender Goeasy Could Easily Continue its Growth

Goeasy (CA: GSY) stock has been on a tear, surging an incredible 172% over the past year, blasting off above and beyond its pre-pandemic highs hit in February 2020. The C$2.5 billion Canadian alternative lender has undoubtedly been a major beneficiary of the heavy consumer indebtedness in Canada. This could remain heightened for the long haul, as the nation looks to enter a higher-rate environment.

Earlier this week, the Bank of Canada (BoC) warned that Canadian households are taking on too much debt. Combined with sky-high housing prices, household indebtedness looks like a potential sore spot for the Canadian economy, as it continues recovering from the coronavirus crisis.

Unsurprisingly, the BoC stood firm with interest rate hikes in its latest meeting. Still, as inflationary pressures rise, they may have few options other than hiking rates. Undoubtedly, such rate hikes will apply even more pressure to the many indebted households and negatively affect their credit.

With inflation jumping to 3.6% in May 2021—the highest it’s been in a decade— Canadian households should brace themselves for increased odds of being rejected by the big banks when they apply for loans. Such an environment is likely to give subprime lenders like Goeasy a boost, as higher numbers of less-creditworthy Canadians turn to the subprime lenders for personal loans. (See Goeasy stock chart on TipRanks)

Easy Road Ahead for Goeasy?

It’s not just the likelihood of higher rates that could fuel increased demand for Goeasy’s “quick and easy” loans.

Many COVID-19 government relief checks, including the Canada Emergency Relief Benefit (CERB) or the revamped Employment Insurance (EI), could expire before the Canadian economy reaches full employment.

As such, demand for Goeasy’s subprime personal loans could continue to remain robust well into the late innings of the pandemic, even with rates on the lower end over the near- to intermediate-term.

Goeasy reportedly approves a vast majority (around 88%) of its customers, and in most cases does so in under half an hour. That makes Goeasy a go-to place for Canadians with less-than-stellar credit to borrow money.

Should the environment entice Canadians to turn to the subprime lenders, Goeasy will be in an enviable spot. The company will have the option to improve the quality of its loan book by rejecting more applicants without taking a hit to its bottom line, or it can maintain its approval rate and enjoy a major earnings boost.

Wall Street’s Take

According to TipRanks’ consensus analyst rating, GSY stock comes in as a Strong Buy. Out of 5 analyst ratings, there are 5 unanimous Buy recommendations. As for price targets, the average analyst Goeasy price target is C$170.81. Analyst price targets range from a low of C$166.01 per share to a high of C$185.01 per share.

Profitability Prospects could Improve Drastically

Looking under the hood, Goeasy’s key metrics are nothing short of stellar—thanks in major part to how tight personal balance sheets have become over the years.

The company has raked in an awe-inspiring amount of economic profits via sub-prime loans across a slew of different categories. This includes secured and unsecured personal loans, small business loans, “creditplus” savings loans, and retail financing.

Due to the subprime nature of the “easy” loans Goeasy provides, interest rates are really high. Higher risk equals higher reward, after all.

The ability to command such high rates has allowed Goeasy to sustain incredibly high profitability metrics over the past decade.

Of late, such metrics have improved drastically. Over the trailing twelve months (TTM), Goeasy clocked in ROE and ROIC numbers of 50.3% and 10.38%, respectively. These are some incredible numbers, which should remain elevated over the coming years as the industry backdrop improves the prospects of subprime lenders.

Assuming the federal government doesn’t step in and impose rate caps on subprime lenders, Goeasy’s business model is sound in the current environment. Goeasy can continue to grow its earnings at its double-digit rate, given potential tailwinds.

Disclosure: Joey Frenette has no position in Goeasy at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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