Maintain their $235 target. GLTA
Rising Delinquencies Temper Market Reaction To Q2 Results Our Conclusion
goeasy reported a solid quarter on a number of fronts. Record quarterly loan
growth exceeded prior guidance, and longer-term growth targets were
revised higher. Adjusted EPS also beat our expectations (albeit modestly),
and the credit loss rate landed within the previously guided range. The
market reaction, however, was tempered by upward trending delinquency
rates. Following management commentary on the call, we feel more
comfortable with the trajectory of credit performance overall.
Key Points
goeasy reported a solid quarter across a number of fronts. Loan growth
exceeded the prior guidance range, reflecting a record quarter (and by a wide
margin). The credit loss rate also fell within the previously communicated
range. Both of these outcomes were pre-released in advance of the reporting
date and were not a source of surprise (see link here), but reflected strong
underlying momentum nonetheless. Adjusted EPS also came in modestly
above consensus (+2%) on slightly higher-than-expected revenues. The total
yield on the consumer loan portfolio landed at the high end of the prior
guidance range, and the company revised its three-year targets higher for
ending consumer loan balances (up 3% to 4% across the forecast horizon)
and total company revenue (by a similar magnitude). The company’s operating
margin expectations were also raised 1% in 2025 and 2026.
Rising delinquency rates, however, tempered the market reaction.
Despite the positive takeaways outlined above, goeasy shares traded down
~4% on announcement. The proportion of loans more than 30 days past due
increased from 3.0% in the prior quarter to 4.7% in Q2. This stood out as the
highest delinquency rate in at least the past decade (and by a healthy
margin). Considering that delinquencies are interpreted as a leading indicator
for future credit losses, we suspect that the trend in Q2 detracted (in terms of
the market perception) from an otherwise solid quarter.
We feel more comfortable with the trajectory of credit following the call.
Despite the notable uptick in delinquencies, management expects a net
charge-off rate in Q3 that isn’t too dissimilar from Q2 (the guided range for
the loss rate stands at 8.75% to 9.75% versus the current quarter at 9.3%).
Management explained how the shift towards secured lending elongates the
charge-off cycle (and therefore structurally causes more loans to sit in the
delinquency buckets), but also acknowledged some level of consumer stress
creeping in. Actions taken to tighten collection practices may have
contributed as well. In any event, management expressed confidence that
based on the projected roll rates (i.e., the percentage of delinquent loans that
will roll into charge-offs), the loss rate should be “very stable and consistent
with the levels we’re at today”. Historically, when management has issued
this type of intra-quarter guidance, it rarely misses (or doesn’t miss by much).
In this context, we feel more comfortable about the trajectory of credit
following the call.