Written by Vineet Kulkarni at The Motley Fool Canada
Market downturns bring attractive opportunities for long-term investors. The year 2022 has been one of those periods where discerned investors have made the most of the recent declines. One such stock available at a discount and offers appealing growth prospects is goeasy (TSX:GSY).
The $2 billion consumer lender goeasy has lost 30% this year, underperforming broad market indices. However, this looks like a great opportunity. goeasy could see a handsome recovery in the long term, driven by its strong financial growth potential.
A fabulous growth story in Canada’s consumer lending industry
goeasy is one of the fastest-growing consumer lenders in Canada that operates through two segments easyfinancial and easyhome. easyfinancial takes care of the consumer lending operations, while easyhome is a furniture lease-to-own company. easyfinancial is the real growth engine of the company and contributes 80% of the total revenues.
goeasy principally lends to non-prime borrowers that conventional financial institutions do not serve. The company’s loan ranges from $500 to $50,000, with interest rates starting at 19.99%. It used to offer a maximum loan of $5,000 back in 2011, which now has increased to $50,000.
Despite being in a risky industry, goeasy has shown superior financial growth, as its lending arm has gained ground in the last decade. Its revenues and net income have grown by 16% and 34% compound annual growth rate (CAGR) in the last decade, respectively. Driven by such a massive, consistent, superior performance, GSY stock notably outperformed, returning nearly 2,450% in the same period. GSY stock also pays stable dividends that currently yield 3%.
The company has seen a consistent rise in its consumer loan portfolio, thanks to its omnichannel distribution and a huge addressable market. It has expanded its geographical presence with more branches in the last few years. Also, its recent jump in the auto loan market also seems to be positively impacting its top line.
The management recently announced highly positive guidance for the company. It expects total revenues of $1.25 billion in 2024, implying revenue growth of a decent 15% CAGR. In addition, it projects to gain a +35% operating margin and a return on equity of 22% through 2024.
The management’s focus on expanding easyfinancial’s locations will likely be a key growth driver for the company. Improving repayment patterns and fast-rising new loan originations also highlight superior financial growth going forward.
Investors should note that not all cheap stocks are a buy. Some are cheap for a reason. For example, rising interest rates and valuation concerns could continue to weigh on some growth stocks, even after their recent pullback. GSY stock, however, seems attractively valued at 10 times its earnings.
Moreover, it has seen a strong recovery since last month and could continue the momentum with its second-quarter earnings next week. goeasy stock could create meaningful value for shareholders in the long term, driven by its strong earnings growth potential, undervalued stock, and stable dividend.
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The Motley Fool has no position in any of the stocks mentioned. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.