The Canadian Investor - Subprime Lending Skyrockets as Cyclical Stocks Face Challenges

Episode Date: September 12, 2024

In this episode, we dive into the Bank of Canada's recent 25bps rate cut and its implications for the Canadian economy. With inflationary pressures persisting in shelter costs, we discuss whether the central bank’s decision could reignite the housing market while balancing economic slowdown. We also analyze Couche-Tard's ambitious bid to acquire 7/11, their Q1 earnings, and the potential risks of such a massive acquisition. Finally, we cover BRP's disappointing earnings and the rise of subprime lending, examining how companies like Affirm Holdings and Propel Holdings are faring in an economy where more consumers are struggling to make ends meet.   Tickers of Stocks & ETF discussed: PRL.TO, AFRM, BRP.TO, GSY.TO, ATD.TO NY Fed BNPL Survey Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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There is quite a bit on the dock today. A little bit of macro with interest rate cuts and then a few, I would say, Canadian darlings in terms of companies that are hitting a snag a little bit. Would you agree with that? Yeah. It's kind of like it's the end of earnings season, but there's still plenty of news to talk about. And it's probably, it looks to be the end of high rates on savings as well. I just got a few notices that my accounts are getting cut. I would imagine that's going to be coming down even further as we move forward. Yeah, I got those same notices. So yeah, it's definitely, you know, it's too bad. I did talk with Brayden earlier this week on the Monday episode for some options for people

looking to park cash. Obviously, I encourage people to go back to that episode because I think it varies on, you know, a lot of different things, especially what you may want to do for that cash, depending whether you're, you know, you're able to lock it in versus not lock it in. You know, there's also longer duration bonds and so on. So if people missed that episode,

do like encourage you to go back to the Monday episode because Monday episode because I talk about a lot of different options available. If you want to cash in on those higher rates, but again, also explaining the downsides. Yeah, I mean, the U.S. is still, they haven't cut yet, so there's still higher rates in the U.S., but it's going to be interesting. Yeah, and speaking of cut, that's a good transition here with the Bank of Canada. I think everyone knows at this point that they cut by a 25 basis point. It was an interesting, did you have the chance to listen to the press conference or no? No, I didn't listen to the press conference. Yeah, I mean, I like to be tortured, so I try to listen to them all.

But I mean, it wasn't too bad this time i'll be honest um there were actually some decent questions overall from reporters in a earlier i would say throughout the year so far unfortunately a lot of the questions were always like when's the rate cut coming how big will it be and so on so it was very repetitive and it was also a waste of time because everyone knows what he was going to answer. But this one was a bit better. TIFF said that it was reasonable to expect more rate cuts, but as always, that they remain data dependent. They said that the economy is in excess supply. I mean, in economist terms, I would say that just means that there isn't enough demand for what is being produced, which is putting downward pressure on prices.

Or in other words, the economy is slowing and they are well aware of it. They did know that shelter and service prices are putting upwards pressure on inflation. So that's still something that they're keeping an eye on. They also noted that CPI is expected to continue easing, They also noted that CPI is expected to continue easing, but it could go higher towards the end of the year because of base effects. So this is actually, and Dan, you can vouch for me, this is something I've been very vocal about, especially when it comes to energy prices. Because people tend to forget that energy prices have been pretty low now for the better part of a year, I would say, in terms of being quite low. And that's always going to be a risk, not just oil, but obviously natural gas as well. If there's especially some geopolitical tensions in the Middle East, if things escalate, it could put some upward pressure on the price of oil.

However, right now, I mean, it's the opposite that's happening. I think the market is focusing more on the demand side of oil because they're seeing kind of slowing the slowing economy in the US. And I think generally the markets are a bit worried about that. Yeah, I mean, we have oil that I just looked it up. It's pretty much $65 a barrel, which is down 4.5% today. Natural gas is up quite a bit. Natural gas is rebounding, I'm pretty sure, quite a bit off the lows. But yeah, I mean, commodity prices are pretty low right now, which is pretty typical in this type of situation.

Yeah, hey, just keep talking about natural gas going up. It's making me pretty happy with my term line position. But I mean, obviously, I think you know my portfolio. I've talked about it on the podcast and joined TCI. Obviously, we share it there. And that's something I've been pretty bullish for the longer term in terms of just holding really good energy companies. I think that's really important.

If you own the really good ones that have very low costs and can be profitable, even if prices go down, I mean, you may kind of trade sideways, shorter, medium term, but you should be fine longer term. And one reporter asked if they were concerned about cutting rates and how that could encourage Canadians to take on more debt. And it was really interesting. I encourage people to look at the press conference if they're interested in seeing the answer. But it took Tiff a bit of time to answer. And he honestly did not really answer the question. He did say that it would help alleviate the debt burden of Canadians like those who have variable mortgages or those who will be renewing their mortgages soon. So obviously, we've talked about this time and time again. If you have a fixed rate mortgage or you're going to be renewing your fixed rate mortgage, that's dependent on bond yields. And bond yields have

actually been coming down for some time now before the Bank of Canada started cutting. So in terms of immediate effect, if you own, you have a mortgage, you're not renewing, you know, anytime soon. It really only has an impact on you if you have a variable rate. And the issue with those renewing and looking at the fixed rate is, like I said, it's really the bond yield. So the Bank of Canada doesn't have that much control over that. I'll put an asterisk. Some people may argue that, you know, they could start quantitative easing and just buying bonds massively and therefore artificially push yields down. But, you know, for the time being, I think it's a bit harder to say that will happen, but it's a non-zero probability.

And the answer was telling, in my opinion, because clearly shelter inflation is still a major concern for them. And to me, it's clear that they're trying to balance easing the pressure that's being put on Canadians that are debt burdened by trying to obviously lower interest rates, but they're also very cognizant of how it could potentially stimulate the housing market. They're not sure. They've mentioned this risk now for a better part of this year that they're very aware and they definitely have an eye on the housing market. Whether it will stimulate or not, it's hard to say. I mean, lower rates, sure, it will make the boring costs cheaper. But at the same time, if people are losing their jobs, right,

like you can't buy a home if you don't have a job. So it's going to be interesting what happens in that space. But I think it's clearly a concern for them and something they definitely want to balance. Yeah, and it's interesting to see, like we did our Canadian bank overview over the last few weeks and just like, you know, the Canadian arms of the business is doing so well, like over the last while, which kind of leads one to believe that maybe, you know, declining rates is spurring more people, more Canadians to take on debt. I mean, I can't remember. It was GoEasy that had crazy, crazy growth in its HELOC products, which would be floating rate for the most part. So, you know, you could get, you would get pretty much instant relief in that regard if they were to continue cutting rates, which could be something that, you know, people

would access, you know, immediately rather than like you said, you know, a fixed be something that, you know, people would access, you know, immediately rather than like you said, you know, a fixed rate mortgage is, you know, it's not going to impact you until down the line. But I mean, it's very interesting to see, I do believe they're in, you know, a bit of a rock and a hard place. So shelter inflation is one of the key drivers now. So you decrease rates because inflation in most areas has come down to a normalized level. But in doing so, do you reignite the housing market and fuel more shelter inflation and rent, mortgages, things like that? But I think rate cuts are pretty much a necessity now. We're sitting at, so outside of a very short stint during the COVID-19 pandemic. We're sitting at, you know, the highest levels of unemployment since 2017. I mean, credit card balance is going up. Discretionary spend is pretty much collapsing. We'll go over that with BRP's earnings. Like it's crazy to see like the

shift there. But I mean, it looks like the Bank of Canada, you know, they made the right decision to start cutting, you know, earlier when they did because it doesn't look very good right now. No, exactly. And towards the end of the show, I'll be going over firm holdings, which is a buy now, pay later earnings. Also talk a little bit about GoEasy, like you mentioned, and Propel, which are two subprime lenders. Propel is mostly in the U.S., but does have a Canadian arm. And spoiler alert, they have seen businesses booming. And without going into too much detail, when business is booming for subprime lenders, it's usually kind of a sign of things to come.

That's because you have those people with not as good credits or can't get financing with traditional financial institution that are turning there. And that's usually a sign that people are getting more desperate because the interest rates are, they're not good to say the least. So I think, yeah, go ahead. Well, especially when we look at when I went over GoEasy's earnings, they reported the highest level of credit rating they've ever had among their borrowers, which is a good thing, but it also kind of shows you that more people with higher levels of credit are having to tap into the subprime market, which I don't really think is a good thing. They probably have too much debt as a whole. They're still able to pay for it,

but the banks don't want to lend to them anymore. Exactly. That's why they're turning to them. That would be my assumption. And I guess for the last thing I'll say, so obviously we talked about the Bank Canada mostly. So here I'm showing the CME FedWatch tool, a great tool to watch. We've been looking at it for probably years now at the Canadian Investor Podcast. And then the Fed, the market is pricing a whole lot of rate cuts for the Fed. So the next meeting here, it's pretty much been like that for several weeks now.

So around two-thirds of a chance for a 25 basis point cut for the Fed and about one-third for 50 basis points. And then if you go all the way to December, so the last meeting of the year, it's basically a 50-50 chance that rates will be either 4% or 4.25%. So the market is expecting some rate cuts. So it's kind of funny when you do the math because there's only three meetings left of the year, including the upcoming one in September. So if the market is pricing it that many rate cuts, there's going to be a 50 basis point rate cut in there somewhere. So maybe it's not September. And I've been pretty vocal that I did not think they would start cutting in September,

mostly because of the geopolitical situation. But at this point, I mean, the jobs numbers were not good. They were revised down for the previous month. They also had a massive revision. I think they revised 800,000 down for, I can't remember which quarter it was, but there was a massive revision done earlier this summer as well. So I think the job numbers are really starting to turn the US and the political risk at this point. I think it's fair to say that Trump will probably find a way to spin this to his advantage. He'll probably say, like, look, they're cutting, like, they're, you know, the economy is so bad with the Democrats that the Fed has to cut like 50 basis point. Like something like that, even though he's kind of warned them not to do that. that, even though he's kind of warned them not to do that. But he probably doesn't understand the economy all that well, because if he knew, you know, a rate cut, whether it's 25 or 50 basis

points, like it will not turn the economy around before the election. So I don't think that's he should be concerned about that. But it's interesting just to look at the odds. And I will mention that the markets have been incredibly wrong about rate cuts. So take this with a grain of salt. I mean, we've talked about it earlier this year, they were anticipating a rate cut in March, right? So they were a bit early on that. Yeah. And now they're pretty much predicting, not a guarantee, but what is it? A 92% chance that we go cut, cut, cut the next three meetings?

If it's only 25 basis points, yeah. Yeah, I think it's almost a guarantee that there's gonna be three cuts in a row. It's just the size of the cuts at this point, yeah. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free,

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Let's switch over here, Dan. So Alimentation Couche-Tard and there's Seven and I, which is the owner of 7-Eleven. So they made an offer to buy the Japanese company, got rejected. So what's the developments there? Yeah. So they made a pretty big offer to buy 7-Eleven Holdings, which again is they own 7-Eleven, but they also own supermarkets and they have some financial institutions as well. I didn't know that. I knew

they owned like some grocery stores and things like that, but I didn't know they had a financial arm, but apparently they do. So they made an offer. Custard pretty much made a takeover offer for 42 billion US dollars, which would be effectively 80% of Custard's market cap right now. So 7i, and I'll probably just refer to them as 711. I don't know. I'm just used to saying 711. They rejected the deal saying the price was nowhere close to what they'd want in the event of a takeover. And I mean, this would make sense to me, you know typical negotiation process like if i got an initial offer even if it was probably pretty close i would probably say it's nowhere close you know in order to try to maximize that you know shareholder value like who knows how far away

they truly are on this type on this price i mean they pretty much say that it's nowhere close. But yeah, who knows? And Kushtar seems pretty adamant to get this done. Initially, the offer was rejected and they weren't interested in negotiating even further. But there was an article released yesterday that says Kushtar is highly confident further discussions would lead to the ability to find more value for 7i shareholders so i mean if we read between the lines here this is pretty much saying kushtar is probably willing to pay more uh for this and just to give you an idea how truly massive this would be so kushtar currently operates 16 800 stores so a successful deal with 7-Eleven would add around 86,000 more stores to its network. That don't stop at gas stations, but like I said, supermarkets.

I knew that element, but even financial service operators, which I don't know much about that end of the business. And I made a few posts on this, including just an overall YouTube video of my thoughts. Um, and I made a few posts on this, including just an overall YouTube video of my thoughts. And I feel, you know, they're maybe just biting off a bit more. They can chew than they can chew here. Um, the company CEO stated that it could comfortably double its leverage ratio and not impact their credit rating. If we consider the fact that the company has around 13 billion in long-term debt on the balance sheet, you can already tell right away, a ton of this is going to be funded

via equity, which is obviously, which is obviously share issuances. They couldn't fund all of this through debt, but I do believe that maybe they're trying to keep it on a friendly level in an attempt to maybe keep 7i in as a large partner. So maybe there's not as much debt equity that needs to be issued to make it happen. And I mean, the acquisition could be an amazing one for CouchTard if everything goes right. But I mean, if you make the assumption that the deal is probably going to come in higher, you're probably talking like nearly doubling the size of CouchTard's overall business from a market cap perspective. And I mean, there's been a few of these offers just right off the top of my head that I can think of for Canadian companies that have done something like this.

Like Savaria, they made a huge acquisition of Handicare during the pandemic, which is like Savaria is like a accessibility type company, like wheelchairs, wheelchair accessible vans, stair lifts, all that type of stuff. So they bought Handicare, which is a European company, similar business operation that effectively doubled the size of the company. So for Savaria, it worked out very well, but it can also end up being kind of a disaster. OpenText, they made a huge acquisition of Microfocus, same thing during the peak of the pandemic. As of right now, it has not worked out very well at all. Interest costs have pretty much ballooned. Earnings are taking a hit. It's not really working out all that well. And at the time, OpenTex has a market cap of around $11 billion. And you're spending $6 billion on an acquisition. I mean, it's material. And then TELUS International purchased WillowTree. They paid quite a bit of money for the company in a pandemic environment.

And again, it just hasn't worked out all that well at all. High interest expenses. You know, Telus International has gotten absolutely thrashed since its IPO. But yeah, I mean, it just it seemed, you know, CouchTard is very good at making small to medium type acquisitions. You know, 300 stores here, a thousand stores there, merging them into the fold. it seemed you know kushtan is very good at making small to medium type acquisitions you know 300 stores here thousand stores they're merging them into the fold i'm really not sure this right now if this would be the best time to go out and probably spend you know 50 billion plus us dollars to do this but um i did take quite a lot of heat for suggesting that you know they might

have might be biting off more than they can chew here a lot of people want this deal to go through yeah i mean i mean i don't know why you're getting a lot of heat because i agree with you i mean look people are kind of saying oh they have this amazing track record i've seen what people are saying like they have amazing track record they'll be able to you know just roll just roll it in, like find some efficiencies, blah, blah, blah, blah, blah. And on like, to me, it's it's just a big risk. And especially right now. So they came out with their Q1 2025 earnings. And look, it wasn't good. It's not been good for a little bit. We were talking about this before we started recording. The reality is people, a lot of people are struggling financially. So if you're going to fill up your car at a gas station where

there's a convenience store, you're probably thinking twice about buying that snack or that bag of chips, whatever it is that's overpriced because it's at the convenience store. You'll probably hold off and you'll end up, you know, buying it at Costco or Loblaws or whatever the, you know, where it's more cost effective for you. And that's been, it's clear in their results here. Total revenues, they did increase 5.1%, but when you start out looking at same store merchandise revenue, that decreased 1.1% in the US, 2.1% in Europe, and 3.9% in Canada. And they mentioned this because essentially there's challenging economic conditions. And obviously, it's not that surprising, like I just mentioned, and fuel volumes were also down. So they also said that

this is a result of consumer watching their spend. So I guess people are not traveling as much, especially for the summer months, which tend to be a lot of people traveling, going places. I mean, we rented a cottage a couple hours away, but I mean, I'm sure some people pulled back because obviously that's an easy expense that you can actually cut out. And margins were also under pressure during the quarter for both merchandise and fuel and earnings per share decreased 2.4% to 83 cents a share. Now, I honestly agree with you. And don't get me wrong. Like Alimentacion Custard has a fantastic track record.

I'm not going to dispute that. I mean, if you're looking, and you can go pretty far back. But if you're looking back the last 10 years, I mean, it's crushed the S&P 500. It's up for total returns at amount that's not costal is up 349 percent the S&P 500 is up 226 percent and you have the TSX 60 that's up 104 percent so it's clearly done something right here but at the same time I'm with you they're trying to buy a bigger player. They're clear. They clearly want this transaction to happen. I'm not sure exactly what's motivating that, but I have a suspicion that it could be kind of, you know, lackluster results for lack

of better word. But at the end of the day, that's a result of the economy. And I think if I was Alimentation Couchetard, I'd continue the strategy of trying to buy smaller players. Because the reality is, people, you know, these smaller players will probably be feeling the pinch even more so than a large company like Alimentation Couchetard or 7-11. So why not take advantage of that, give them an exit strategy, and 11. So why not take advantage of that, give them an exit strategy, and probably get a good deal on those transactions. Sure, they might not move the needle as much, but you'll probably get way better return on your investment by doing that. I just don't understand that, you know, how, why they want this deal to go through so badly. Um, their track record, I'll be honest, means nothing. Like when you're looking at, you know, making, they've made

substantial acquisitions over the years as well, but you're looking at something that's completely another level here. Yeah. You're effectively doubling the size of the company. It's, uh, it's definitely a notable acquisition rather than the typical add a few gas stations here and there. And the market is so fragmented. That's why they can do, they could constantly do this, right? Buy those smaller companies, 250 stores, or they'll buy the convenience store arm off some company, you know, a thousand gas stations or whatever it may be. Yeah, yeah. And they did this in, it was 2021.

They tried to buy Carrefour, which is, it was like a French grocer. Carrefour, yeah, yeah. Yeah, and it was grocery stores. And everybody, that one kind of puzzled everybody like more than this, because at least Seven Eye is a gas state. Like they're're convenience stores like kustard's bread and butter but that that grocery store you know bid and you know they bid a bunch of money on that i remember the stock absolutely bombed after that because people were kind of like what are they doing here but this kind of seems like uh you know, what are they doing here?

Because they just like. I'll say it. Yeah, what are they doing? Yeah, it kind of should be dead in the water because like Seven Eye just pretty much said, no, not even entertaining it at that price. And Kushtar keeps going, you know, like, okay, well, if you won't entertain it at that price. Again, you read between the lines. It looks like they're willing to pay a bit more here or possibly, you know, to make something work out and which like don't get me wrong it could they could buy this

everything could go right they could integrate the 7-eleven gas which i do believe cruistar does have higher margins than seven i like if they technically do buy all these uh you know they they they add the efficiencies in it It could work out really, really well. But you don't just double the effective size of your company in terms of an acquisition when not there being huge levels of risk as well. Yeah. And then there's also the regulatory portion. I think I read that they were probably divest parts of the business to make sure it would go through. But again, there's no guarantee it would go through. And honestly, at this point, it feels like Seven and I would only sell if

Kushtal overpaid. And if Kushtal overpays, how good of an investment can it be? That's the question. So I mean, I'm sure there's going to be more development in the next few weeks. So we'll have to keep an eye on that. But the name of time let's move on here and go over another canadian i would say a canadian darling to some extent that's also been struggling quite a bit so do you want to go over brp earnings yeah so brp which is uh pretty much bombardier recreational which has no affiliation with Bombardier. They kind of do, but they separated out, I believe it was like probably 20 some, 25 years ago. So they're a separate entity and they pretty much make recreational vehicles. They're struggling

quite a bit over the last while here. Revenue came in at 1.84 billion, which is a 33% decline from last year. And earnings per share of $0.61 fell by $2.60 over the same time frame. So there's a big slowdown here. Full disclosure, I do own a position in BRP. I believe it's an outstanding company. I mean, cyclical stocks will be cyclical. And the company is just currently taking a pretty big beating on large scale reduction in discretionary spending, especially in particular segments of the business. So the company's ATV and side-by-side business seems to be holding up a little better than its

other segments. When we look to year over year sales in these departments, they're either flat or down by single digits. And the company is just continuing to capture overall market share in these areas i mean they continue to capture market share everywhere but these areas of the business are holding up quite well and i'm not exactly sure why that would be i mean maybe it's because atvs and side by sides can be used for you know non-recreational purposes i don't know maybe that's that would be part of their power sport revenue right yeah yeah yeah which i have here obviously that's also declining but not as much as i think the marine yeah yeah the the marine side of the business it's much smaller than power sports but it is no doubt struggling so i believe the marine

end of the business is down 30 year over year so yeah sales are down in the high 30 range for pontoons and high 20 range for personal watercrafts and personal watercrafts would be like sea dues things like that like uh and i believe only like maybe single or double use boats things like that but um i mean the the struggles in many segments resulted in a 71% decline in earnings per share on a year over year basis, 86% decline in free cash flow. And this is despite the company reducing capital expenditures by around 20% on a year over year basis. So being honest, there really wasn't anything at all I could point out in the quarter that was a positive, except for the fact that they're continuing know continuing to gain market share in north america which should bode

well for when when discretionary spending returns and i mean the thing about it is it's like not really anything the company is doing operationally it's like it's unavoidable what's happening right now is unavoidable which is kind of why i think, you know, the stock is definitely getting hit, but it's not getting like you would figure with the results it's posting, it would be getting obliterated. I mean, you're talking, you know, massive declines and, you know, reduction in guidance, which I'll talk about in a sec, but yeah, it's, it's nothing, the company, it's completely out of the company's control. They're probably also having some of their dealers, they must have to put some

pretty substantial discount, right? Because I'm assuming they overproduce. That's usually how it works. They are overproduce. And then, you know, there's excess inventory. You got to discount some older models that you still have in stock. I mean, it's nothing against them. Obviously, I'm pretty familiar. Like I mountain bike.. People know on this podcast I've been listening. And the biking industry, I've seen the exact same thing. They overproduced because demand was through the roof during the pandemic because everything was locked down. Everyone and their brother and sister wanted to buy a bike, whether it was road or mountain bike. There was, you know, shortages.

They started producing a whole lot to meet demand and then everything started reopening. Demand fell off a cliff. And now, I mean, if you're looking for a bike, now's the time to buy one. I'll just say that. And that's usually how it works because now companies are adjusting and then the cycle kind of will restart eventually where the companies will not be producing enough. Demand will start picking back up and then you get into that cycle again. Yeah. Yeah, exactly. We saw the exact same thing with Aritzia. They loaded up on a ton of inventory and that would have been 2022. And then rates started going up, spending started slowing. They ended up with a ton of excess

inventory. And then you got to mark that inventory down. It kills your margins. It, you know, kills your sales overall. And then you, like these companies always go through, you know, peaks and troughs, like it, it's just going to happen. I mean, there's nothing the company could do. And I mean, the one, the one thing is, uh, we'll go to their guidance. So when we go back to the final quarter of fiscal 2024 so right now this company is is currently in the second quarter of its fiscal 2025 year they kind of they're like forward almost an entire year it's pretty confusing for a lot of people but they they would have closed out fiscal 2024 three quarters ago so they issued guidance back then, which for the most part, their year round products and power sports products would see a 5% reduction in sales. So that's kind of what

they ballparked. They projected 9.5 billion in revenue on the high end, 1.47 billion in EBITDA and $8.25 in earnings per share. So through the next three quarters, the company has slashed its guidance every single quarter. And typically the last two quarters, it's been like tiny amounts. However, in this most recent quarter, it just cut guidance massively. So revenue is now expected to come in at 8 billion on the high end versus, what did I say $9.5 at the end of 2024. EBITDA in the $940 million range compared to $1.47 billion. So you're looking at a more than 33% decline there. And earnings per share at $3.25 versus $8.25. So this is a 61 percent decline in earnings guidance over the course of nine months they gotta pull guidance yeah exactly like we were talking about that

yeah because the revenue guidance i looked through the earnings report and if you take out you know when they issued guidance for fiscal year 2025 because you can't you know you can't cut guidance when you issue it yeah so if you take out that, it's actually four quarters in a row that they cut revenue guidance going back to fiscal year 2024. So it's not good. And I totally agree with you at this point. I don't think the market would blame them. Look, there's so much uncertainty about the economy and clearly it's a cyclical business. Just, you know, cut the guidance, say, look, given the, you know, economic environment, it's just too difficult for us to issue guidance right now when things are better or something.

Like the market may kind of not like it for, you know, a couple of weeks or something, but I think it would definitely help over just, you know, every single quarter cutting. Yeah, like this just kind of shows you that they have absolutely no idea how bad it's going to get i mean when you're when you're taking it down every single quarter i mean you may as well just pull it the market probably would not react very

well but the market also won't react very well if say you know next quarter you decide to slash it yet again i can't remember the i think it was actually canada goose that ended up pulling guidance once like the pandemic hit and uh the stock did take quite a big beating but it also like they had no idea what you know what was going to happen moving forward so just y yank the guidance and, uh, you know, just until you get some sort of stabilization and you can say, Hey, now we can, you know, accurately predict instead of, you know, what looks like to be complete guessing right now. Yeah, exactly. I think there was a few airlines too, during the pandemic for rightfully so they, they just didn't know. But I think that's the right thing to do is, unfortunately, when you don't know and you just it might be better just to buy the bullet and pull the guidance. But look, I think I'm with you. And you have to keep in mind these cyclical business like this is, you know, if it's a

business that interests you, this one now should be the time that you have it on your radar, because it's, you know, it's obviously experiencing a pullback, probably not as much as I would expect it. Then you mentioned that as well, but it is definitely, these are the kinds of businesses you want to be buying when there's some pretty strong headwinds and the PE looks high, especially, you know, if you're looking at a backwards looking PE, it may look high because, you know, the price is still, you know, it's still somewhat elevated, but the earnings are declining pretty quickly. So you have to keep that in mind. Even the forward P may look high compared to, especially if things are, you know, going downwards, but it's, I know it's a bit counterintuitive, but a high P is typically when you'll want to buy these businesses because when the P is low,

it's because usually like they're kind of mid late cycle and things are still growing pretty rapidly. Yeah. With cyclical stocks, I mean, obviously it's not an absolute guarantee, but the time to buy them is when the P is high and the time to sell them is when the PE is low. Because obviously, BRP is now going to report a huge decline in earnings. It's going to artificially, it's going to inflate the price to earnings huge, which kind of shows you they're at the bottom of a cycle, right? Earnings are declining, price is still a little bit higher, so PE goes higher. But then when the price to earnings is really low, you've got high earnings, high price, they could be entering into what we're seeing right now, which is a clear downtrend.

Yeah, the E is declining faster than the P, basically. Exactly, which is like, it's the complete, when you think about it, it's the complete opposite of what many would believe. They would believe that a high PE is an overvalued company, but with cyclical companies, it's very difficult to ever gauge them off like a straight up price to earnings valuation, just because earnings fluctuate so much. Yeah, exactly. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select

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So go ahead, Blossom Social in the the app store and I'll see you there. So I know, I think that was a great overview. Anything else to add or we'll go on to the marvelous world of subprime lending? Nope, that's it. Let's get into the subprime lending. Yeah. So I mean, I said subprime lending. For those not familiar with the term, I think I would encourage you to go and watch The Big Short. I believe Margot Robbie has a great scene where it's basically it means, you know, hopefully we won't get banned, but it means shit. That's what it is. Subprime means shit. So basically, I think that's a bit excessive.

Obviously, it's funny in the movie, but subprime is typically for people who can't get financing elsewhere. And Affirm Holdings, it's probably not classified as a subprime lender. I'm going to go ahead and say that's what they are because they're a buy now, pay later. And the reason why I'm saying that is because the New York Fed had a very interesting study that they did. They did a survey, a pretty extensive one. They actually did several, but I'll put the link in the show notes. I actually talked about that with Braden a couple months back. It would publish in February.

And what they found with buy now, pay later is that, well, first of all, buy now, pay later, there's a couple different ways they make money. So they can make money on merchant fees for offering services the reasoning is that the merchant might not make the sell without the user using buy now pay later so fees are actually as high as five to six percent for the merchant there is interest on loan so there are loans offered by buy now pay later services on a longer term and then there's the late fees if users don't pay their full installment on time they can be charged late fees but most people know them more as you know buy now pay later you buy it now and you have like four equal installment without any

interest so that's usually what people know them as now to be to be fair, during that study, one of the things is that they found financially fragile households are more likely to be repeat user versus financially stable households. They were also more likely to use BNPL, so buy now pay later, for smaller everyday purchases, whereas stable households were more likely to use it for larger purchases to avoid paying interest. stable households were more likely to use it for larger purchases to avoid paying interest. And financially fragile households are more likely to make small and medium purchases that they could not otherwise afford if they did not use that. So just some context here. When I say I see them more as a subprime lender, that's the reason because I'm not just basing that on what the temperature is outside. It's actually the New York Fed had some very interesting data on that. Before I get

started, any comments there? No, I mean, it makes complete sense. I've even seen these where you can buy now, pay later, like on a pizza. It's pretty alarming. yeah i mean i can see if they give you interest free like on larger purchases i mean it makes complete sense if you're disciplined enough to actually put the money in it like an interest bearing account exactly and then you know actually make those payments that you they do that for a lot of you know like electronics companies you know you can sign up for a 90-day interest-free period where you don't have to make any payments and everything and you know they're they're pretty much banking on people or a year or something yeah exactly and then and then people forget and then the interest rate is like 20 percent exactly alone once it kicks in yeah like they don't issue

these these setups you know they're making money they're pretty much planning on you you know forgetting and then you get hit with a extremely high apr loan that you know you were you got interest free for a year sure but now you're paying 20 on on your television but yeah it's um i mean it's definitely something that you know lower quality you know higher risk borrowers are going to use, which is very similar to the subprime market. Exactly. So revenues were up 48% over a year to $659 million. They posted a loss of $45 million, but it's the lowest loss they've posted since going public. Free cash almost doubled versus last year to $31 million. Now, gross merchandise volume, versus last year to 31 million. Now, gross merchandise volume, that one was pretty interesting. So it was up 31% to 7.2 billion for the quarter. And if you're looking here at the

full year, because that was also their fourth quarter, their growth is just insane. So since 2019, so prior to going public, they've grown the gross merchandise volume so that's just a sum of the total goods that are purchased using that so it's not like you know it's not the revenue or anything like that it's just the volume but it's grown at a compounded annual growth rate of 58 and it's grown even if you kind of look at the last, like, say, since 2022. It's still grown at 31%. And that's when interest rates started to go up. So there's a lot of people still using this.

And I don't think it's about to stop anytime soon. So this is a little bit alarming just to look at if you're thinking about the economy in general is that a lot of people are resulting to this and it doesn't seem like it's going to be stopping anytime now. Active consumers were up 19% to 18.6% sorry to 18.6 million and what's interesting there is that New York Fed survey I was talking about I remember them saying that the biggest obstacle for using buy now pay later was using it once so keep that in mind when you see the consumers that are up 19 it means that there is a likelihood of repeat users coming in i was confused by what that meant at first but yeah so like yeah the biggest hurdle is using it once but but then after that, you're likely to use

it again. To use it again. Which makes sense. Yeah, makes sense. The number of merchant offering the services also grew 19%. The transaction per active customer was up 22%. So definitely everything seems to be up, know, up, up and up here. The delinquency rates were also up.

So not great. That's something it's hard to know because these the buy now pay later space is pretty new. But the only thing we can really compare is those subprime companies. But 30 plus days delinquencies was up 30 basis point to 2.4 percent. That's year over year. 60 day plus was up 30 basis point to 2.4%. That's year over year. 60 day plus was up 30 basis point to 1.5%. And 90 plus days was up 10 basis point to 0.6%. So clearly, I mean, they are getting the money within that period.

That's what my, you know, I assume from those numbers. But still, something to keep an eye on if you're interested in this business. And in terms of guidance, they are forecasting gross merchandise volume, GMV to grow at a whopping 26% next year to $33.5 billion. So it is something to keep in mind. I mean, to me, I think it just shows whether it's, you know, consumers getting more comfortable with these services or it's probably, yeah, consumers getting more comfortable with these services. Like that survey said, once they use it, once they're more apt to use it again afterwards. But it's probably a combination of that and people trying to make ends meet by using these services. So that's kind of my sense, my best guess. Before I continue here and I talk about what we're seeing in Canada a little bit on the subprime, anything you wanted to add? No, I mean, it seems like a pretty interesting business model. So pretty much

these guys pay out the retailer and they assume all the risk, I would imagine, of the loan. Yeah, I think they resell some of the loans. Okay. But they do have some of the loans on the book as well. But yeah, they pay the retailers. People can also, for firm holdings, they can, I think there's also a card that you can purchase and essentially, like, I guess a little bit like a credit card in some sort i mean it's funny because there there's all these products and they're almost like just a repackage of what's already available elsewhere but um so those are kind of the things and also there's the yeah i guess there's loans interest loans so they have like when you look at their earnings they'll have the actual numbers and then excluding peloton because they do a lot of the peloton

financing yeah so um so they kind of give both numbers just uh so people get a little more context here yeah and i've started noticing this i've started noticing this with my credit card as well like i have a cibc like costco card and when i log into the statements there's like particular transactions where i can split into like four different payments interest really yeah but it's only particular it's not everything it'll be like you know every 10th transaction there'll be a particular transaction where i'm able to if i wanted to cut it into four and uh i believe it's interest free for a certain amount of period. But yeah, I mean, I've never used it, but it's definitely, this is a very fast growing segment

of financial lending, I guess you would say. Yeah. And there's probably going to be some regulatory kind of movement in the next couple of years too, because it's kind of a gray zone right now. We don't know like exactly how much money there is tied up there. When you look at all the companies, not all of them are publicly traded. One, you know, I think a square owns a afterpay, if I remember correctly. So there's different, uh, different companies as well. Something to keep an eye on. Now, if we look at during this, so since March 2022, GMV has increased at an annual rate of 31%. I think I mentioned that earlier, but during the same time, if you look at GoEasy Financial, their gross loans have increased 34% at an annual rate. So that is the numbers of an actual subprime lender.

And Propel Holdings, which is another subprime lender listed on the TSX, has seen its loan receivable increase a whopping 41% year over year. Now, Propel is, I think, around like 80%, 90%. It is US in the business, so their business. But if you look at their financial statements, they do break it down between their different arms. So their Canadian arm actually has seen their loan receivable go from 11 million to 21 million, so almost double in the span of six months, which is pretty crazy. I mean, obviously, it's a small base, so you have to keep that in mind. But the products they're offering, they're actually lines of credits. And the interest rate starts at 19.99% and goes up to,

I believe, 46.9%, if I remember correctly. I'm assuming there's a regulatory thing in place for the 46.9% where they can't go over 47%.'m gonna assume that and it's only offered in a three canadian provinces i don't have them offhand but uh it just gives you an idea that there is more and more demands for these types of loans right now even in canada oh yeah like if you look at i've followed these two companies quite a bit over the last while and if you look at the two best performing well two of the top four best performing stocks on the tsx index over the last while. And if you look at the two best performing, well, two of the top four best performing stocks on the TSX index over the last 12, 18 months, it's Propel and it's GoEasy. And I mean, they're just, they're exploding in popularity. Like a lot of Canadian financial

institutions haven't really done all that well, except these subprime lenders over the last bit. And I know like Propel is a very interesting company, but it's one I've never really decided to own just because I have no idea how the US subprime market... I don't know any sort of regulatory information on that. I mean, I'll probably take the time eventually to dive into it, but I know they do AI underwriting, which is supposed to eventually completely remove any sort of human error when it comes to underwriting, is supposed to eventually you know completely remove

any sort of human error when it comes to underwriting which who knows I have my yeah my doubts I mean especially since they're only 12 years old as a business yeah so they haven't seen any like look 12 years from today that was right that was what three four years out of the great financial crisis, or at least a couple of years. So clearly, I hope they have their AI models well-trained, and I hope they are factoring that in, because I think that is definitely a big risk for these companies. And I think their Canadian arm for Propel Holdings, so it's foracredit.ca. So it is, yeah, 19.99% to 46.9. The biggest risk

for these companies, and I think you said it, right, they've performed so well, is that if you look back at history, when subprime really takes off and, you know, they see their loans kind of grow, the origination and the loans they have on their books really grow, which is good, right? It means that, you know, from a business perspective, they're getting more and more money, more interest on these loans. But then again, it's also a sign that there's more and more consumers that are resulting to these loans. And I mentioned 19.99% up to 47%. I mean, you have to be pretty desperate to go for these loans for a line of credits. Let's be honest. I mean, either you're desperate or you can't get

approved to a big bank, but either way, you're kind of between a rock and a hard place. So if you're resulting to that, I mean, it's safe to assume that you're probably not in a great financial situation to begin with. You probably have income coming in, but at the same time, you know, you're probably having trouble making ends meet as it is. So if we're going into an economic downturn, you can, people can probably start doing the math here is that insolvencies will probably, or delinquencies will probably start rising pretty rapidly in the next year or two. And it's probably a sign that we're going into a recession.

I mean, if you look at all the recessions, most of the time like this happens, there's a sharp rise in subprime lending. And then the recession happens not too long after that. Yeah, pretty much. I mean, nobody willingly accesses the subprime market. It's usually a result of them not being able to access better loans, better capital. I mean, the one thing I'll say about GoEasy is they have been put through the ringer. They've been through the dot-com bubble. They've been through the financial crisis, the COVID-19 pandemic, and they've come out of it

not unscathed, but they've returned, you know, they've put up very strong results, whereas Propel hasn't really been around. They haven't really had to take that, you know, big financial shock yet outside of like the COVID-19 pandemic, which really didn't turn out to be all that big of an issue for many of these companies anyway. So, I mean, that's a big added element of it as well. But yeah, it's just, it's crazy growth in these markets and go easy delinquencies have been going up. I know they trended around, they target nine to 10%. And I believe over the last year, they've gone from 8.5 to, you know, 9.2 or 9.3 and they keep ticking up. So it'll be interesting to see, you know,

what happens if they do get close to that 10, you know, 10% target, which would be their upper range of what they would view as comfortable. For delinquencies? Yeah. Charge-off rates. Charge-off rates. Okay. Yeah. And here I have like the return.

So go easy. Yeah, that's the name I would probably consider if I was looking that way, but not right now. The time to buy these is when the economy rolls over and when these delinquencies rates really start going up because now they're trading, I mean, at pretty high valuations. And keep in mind for those joining TCI, this is only up until 2016, this chart. I just wanted to show what happens when there is a downturn.

So you can clearly see here that the company is doing, you know, posting the stock is doing quite well up till pretty much like mid late 2008. And then it just takes a massive haircut. I'm just going to say like probably takes at least 50% haircut there. So I just wanted to show that because subprime lender, that's going to be, you're going to have to deal with that if you want to hold it long term. Or you can be opportunistic and when you enter that big drop in stock price because delinquencies start rising, then it could be a good opportunity to start into it. And like you said, I think GoEasy, the thing it has going for it is has been in the business for a long time. It has seen recessions. So they're probably well prepared with what's coming. Whereas Propel Holdings,

I'm not so sure. Even Affirm Holdings, I don't know how well they will be prepared. So something to keep in mind because you're, yeah, you're not dealing with the best credit quality. That's for sure. No, you're dealing with better quality consumers now in terms of credit, but that's just more so because they're having to tap into the subprime market because of how crazy cost of living everything here in Canada is just getting a bit outrageous. Yeah. Especially if you go to uh the convenience store yeah exactly nine bucks for a bag of doritos yeah i think this summer i think i mentioned it i went to i think it was a circle case so um alimentation costal there it was on

canada day so nothing else was open i go in for uh to get my daughter a drumstick yeah those ice cream cone i think it was like 550 something like i couldn't believe it's ridiculous i was like yeah i still bought it because obviously uh she wasn't too happy and needed something to soothe her a little bit but um haven't gone back since yeah there's uh convenience is getting very expensive yeah yeah that's for sure. That's why they call them convenience stores, but when money gets tight, the convenience is not worth it.

Yeah, no, exactly. Well, I think that's it for today. I think it was a fun episode between macro and I guess cyclical businesses. It was good to look at that. I'm sure we'll be back with more news about Arimanta. It sounds like that's not over. That's not over.

No, exactly. So appreciate you listening. You can look me up at fiat underscore iceberg on Twitter slash X and then at stocktrades underscore CA on there as well. So thanks for listening and we'll see you next week. The Canadian Investor Podcast should not be construed as investment or financial advice. The hosts and guests featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.