A growth stock in the consumer goods sector

goeasy Ltd. is a provider of consumer goods and alternative financial services. The Company is engaged in merchandise leasing of household furnishings and home electronic products and offering unsecured installment loans to consumers. Toronto-based analyst Doug Cooper, head of research for Beacon Securities, says the stock is “considerably undervalued”.

A possible dividend increase of $0.10 a year and a record 2015 fourth quarter are among the glowing forecasts that Beacon Securities head of research Doug Cooper makes for consumer goods stock goeasy Ltd. (TSX─GSY). He maintains his ‘buy’ recommendation and a 12-month target price of $41.25, calling the stock “considerably undervalued”.

goeasy operates as a consumer goods leasing company in North America. The company leases brand-name furniture, appliances, home electronics, and computers through corporate and franchise stores. It also provides personal loans and financial services, such as cheque-cashing and prepaid cards.

(The company, formerly known as easyhome Ltd., changed its legal corporate name last September.)

An expanding loan book, with only 14 per cent of the book coming from oil-price affected Alberta, is one of the main reasons for his optimism. The analyst says Ontario is the key region of focus, accounting for 50 per cent of total loans, which are expected to have reached $286 million at the end of 2015.

He writes:

We anticipate 2015 fourth-quarter revenue of $83.4 million, and adjusted earnings per share (EPS) of $0.58, excluding stock-based compensation.

With such compensation running at about $0.06 to $0.08 per share, headline GAAP (generally accepted accounting principles) EPS could be $0.50 to $0.52.

A weak dollar should stimulate the manufacturing sector in Ontario (creating jobs) and lower prices at the gas pump should both help the consumer.

A growing revenue base in easyfinancial should drive greater operating leverage. We therefore expect a sequential improvement in operating margin (32.4 per cent in the fourth quarter).

Dividend growth stock pays about 30% of EPS

goeasy’s dividend payout ratio has historically been about 30 per cent of trailing GAAP EPS. Maintaining payout ratio of about 30 per cent could increase the dividend by $0.10 a year, to $0.50 or $0.125 per quarter.

With long-term funding in place to grow its loan book to between $360 million and $390 million (the company’s 2016 year-end target) and beyond without any share dilution, we believe goeasy is set up for significant EPS growth over the coming years given the strong leverage to earnings. With a $390-million loan book, we believe goeasy could have an EPS run-rate of $3 or more within a year.

That would imply a forward price-to-earnings (P/E) valuation of six times.

 

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846