The Canadian stock market has seen its fair share of turbulence this year, but few companies have fallen as dramatically as goeasy (TSX:GSY). Once a darling of the financial sector, the alternative lender has seen its stock plunge close to 70% this year. Although, it has rallied by about 24% in just the past month.
Based on the company's latest first-quarter earnings report, the challenges are mounting, and the risks for shareholders are significant. The biggest red flag is the staggering deterioration in credit quality. The annualized net charge-off rate skyrocketed to a troubling 17.8%, up 890 basis points from the same period last year. This surge in bad debt was primarily driven by unfavorable performance in its merchant-originated automotive and powersports loan portfolios, forcing management to aggressively tighten credit underwriting.
Consequently, the company swung to a severe net loss of $53 million, or $3.22 per share, compared to a profit just a year ago. Operating income plummeted by 80%, reflecting the massive toll that loan defaults and a higher allowance for credit losses are taking on the bottom line.
For income investors, the news has been even worse. The board of directors has indefinitely suspended its regular quarterly dividend and halted all share repurchases to prudently preserve capital and maintain liquidity. Adding a final layer of uncertainty, management recently adopted a shareholder rights plan, a defensive move often used to block hostile takeover bids during vulnerable periods.
While the consumer loan portfolio remains large at $5.36 billion, the massive spike in defaults and the suspended payout make this former high-flyer incredibly risky. Although it's been rallying recently, there's still plenty of room for the stock to fall back down, especially with plenty of risk and uncertainty still surrounding the business.
Tech Insider
