Key stock goeasy’s earnings are growing fast as it expands across Canada. Especially since it buys back its shares. The company has raised its dividend for three years in a row. Goeasy remains a buy for long-term share price gains and growing dividends. But just like stand-up comic Rodney Dangerfield (who, quite coincidentally, starred in a 1983 movie titled Easy Money), the stock “don’t get no respect”.
We regularly review Greater Toronto-based consumer goods and financial services stock goeasy Ltd. (TSX—GSY). Since we published our April 7 issue, its shares have fallen by 7.3 per cent—the worst of the retail stocks on The Back Page feature of The Investment Reporter.
This surprises us. After all, its easyfinancial division has entered Quebec and goeasy continues to grow. It’s expected to earn record profits this year and next. The company has raised its dividend again. It continues to buy back its shares. And goeasy is attractively-valued. It remains a bargain stock to buy for long-term share price gains and decent growing dividends.
On June 30, goeasy operated 215 easyfinancial locations. This included 43 kiosks in easyhome stores. Goeasy operated 173 stores, of which 28 were franchises and two were consolidated franchised locations. Goeasy writes: “easyfinancial is a non-prime consumer lender that bridges the gap between traditional financial institutions and costly payday lenders . . . easyhome is Canada’s largest lease-to-own company, offering brand-name household furniture, appliances and electronics to consumers under weekly or monthly leasing arrangements.” Easyhome’s same-store revenue rose by 1.4 per cent to make it 29 quarters in a row of improvement.
Goeasy is expanding into Quebec
On April 3, goeasy expanded easyfinancial in two ways. First, it began lending in Quebec through a retail location in Greater Montreal and its online and call centre channels. By the end of this year, it expects to lend money from 11 more locations. Quebec is the second-most populous province. This should add significantly to easyfinancial’s earnings.
The second way easyfinancial will expand is by lending directly through more easyhome retail locations. It will operate in 33 of these locations. By the end of this year, 100 or more easyhome locations will offer easyfinancial lending services.
Easyfinancial will offer secured lending. It writes: “These installment loans will provide customers with access to larger loan sizes and lower interest rates while reducing the Company’s risk, as these loans will be secured by real estate. The reduced yield achieved from this type of product will be offset by lower credit losses and costs.” Easyfinancial will lend $15,000 to $25,000 for up to 10 years.
Easyfinancial may, however, face limited demand for its secured loans. That’s due to “rates starting from 19.99 per cent”. Homeowners could pay a fraction of that on a HELOC (Home Equity Line Of Credit). Only truly desperate borrowers are likely to agree to pay so much in these days of lower interest rates. To assist the expansion of easyfinancial, goeasy issued convertible debentures to raise $53 million. The holders can convert into goeasy shares at $44 a share until these debenture mature on July 31, 2022.
Goeasy’s earnings are growing quickly
In the six months to June 30, goeasy earned a normalized $16 million, or $1.14 a share. This was up by more than 19 per cent from normalized earnings of $13.3 million, or $0.956 a share, a year earlier.
In all of 2017, goeasy’s earnings are expected to jump by more than 38 per cent, to a record $3.08 a share. Based on this estimate, the shares trade at a price-to-earnings, or P/E, ratio of only 8.7 times. This looks like the stock is a bargain, given the company’s growth. Next year, its earnings are again expected to jump by more than 38 per cent, to $4.26 a share. This works out to an even better P/E ratio of 6.3 times.
This fast earnings per share growth partly reflects goeasy’s repurchase of its own shares. Goeasy can repurchase up to 300,000 shares until June 26, 2018. We expect it to continue to buy back some of its 13,363,158 shares. After all, it bought back 160,988 shares over the latest year. Management is targeting a return on the shareholders’ equity of 18 to 19 per cent this year.
This is an edited version of an article that was originally published for subscribers in the August 25, 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.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846