A bargain stock worth more than it’s trading for

Consumer goods and alternative financial services stock goeasy Ltd. is growing fast and raising its dividends quickly. Yet its shares, like Rodney Dangerfield, “don’t get no respect”. They trade at a low price. The shares are a buy for long-term gains plus decent and growing dividends.

We regularly review Toronto-based furniture and financial stock goeasy Ltd. (TSX—GSY). Since we published our November 4, 2016 issue, its shares have risen by 12.7 per cent. They have momentum. The company earned record profits in 2016. It’s expected to earn record profits again both this year and next. Goeasy used its growing earnings to raise its dividend by 44 per cent. This growth stock remains a buy for further long-term gains as well as decent and growing dividends.

Goeasy operates through two main divisions, easyfinancial and easyhome. With 208 locations, easyfinancial “is a non-prime consumer lender that bridges the gap between traditional financial institutions and costly payday lenders”. With 176 stores, easyhome is “Canada’s largest lease-to-own company, offering brand-name household furniture, appliances and electronics to consumers under weekly or monthly leasing agreements”.

In 2016, goeasy earned an adjusted $33.2 million, or $2.38 a share, excluding one-time items. This was up by nearly 41 per cent, from $23.7 million, or $1.69 a share, the year before.

Based on the better earnings and a strong outlook, until at least 2019, goeasy raised its dividend sharply. It now pays 72 cents a share. That’s up by a healthy 44 per cent from 50 cents a share last year. The dividend yields a decent 2.5 per cent.

Stock raises its dividend, buys back shares

Goeasy also rewards its shareholders by buying back more shares than it issues. In 2016 it repurchased 435,800 shares. This was partly offset by the exercise of RSUs (Restricted Share Units). They raised the share count by 337,000. The exercise of stock options lifted the number of shares by 9,000. Through the DRIP (Dividend Re-Investment Plan), shareholders acquired 4,000 shares.

Goeasy “intends to continue purchasing shares for cancellation under this NCIB”. (A NCIB, or Normal Course Issuer Bid, is just a stuffy and formal term for a share buyback plan.) The company can buy back up to 550,305 shares until June 27.

In 2017, goeasy’s earnings are expected to jump by nearly 30 per cent, to $3.09 a share. Based on this estimate, it trades at a forward price-to-earnings, or P/E, ratio of 9.4 times. This is attractively low for a company with such fast-growing earnings per share. Next year, goeasy’s earnings are expected to leap by more than 31 per cent, to $4.06 a share. Based on this estimate, the shares trade at an even better P/E ratio of only 7.1 times. This stock is a bargain.

President and chief executive officer David Ingram said: “Over the past 15 years, on a normalized basis, we have achieved compound annual growth rates of 11.7% for revenue, 22% for operating income and 19.3% for earnings per share.”

Goeasy expects to accelerate its growth

Goeasy has four “strategic imperatives”. One is to expand easyfinancial. A second is to improve its product offering. A third is to “evolve its delivery channels”. The fourth is to carry out its strategies with efficiency and effectiveness.

Goeasy sees “significant demand for non-prime lending in Quebec”. It plans to expand there. The company is introducing secured lending and risk-adjusted pricing, which can lower its interest rates.

By the end of 2019, goeasy plans to have 260 easyfinancial locations; a gross consumer loans portfolio of $475 to $500 million; and easyfinancial operating margins of 40 per cent or more. Easyfinancial is goeasy’s growth engine. In 2016, it accounted for 78 per cent of the total operating income. Easyhome accounted for only 22 per cent of the operating income.

Recognizing the growing emphasis on easyfinancial, we expect its earnings to continue to outpace those of easyhome.

The consensus recommendation of two analysts is ‘strong buy’. We rate it a buy for further long-term share price gains as well as decent and growing dividends.

This is an edited version of an article that was originally published for subscribers in the April 7, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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