Should You Buy The Drop In GreenSky?

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About: GreenSky (GSKY)
by: Ranjit Thomas, CFA

Summary

GSKY is down 40% on reduced guidance.

The company is in the hot fintech space but has made a misstep.

An actionable options trade is recommended.

Introduction

GreenSky (GSKY) is down more than 40% on Nov. 6 as the company announced reduced guidance for the year due to deteriorating trends in its business. It's no secret that increasing interest rates are slowing home purchases and big ticket financing, and the company is seeing the ill effects of this trend. Clearly, this is a knock on management for not planning ahead for this contingency.

On the face of it, the September quarter results were good and met expectations. Revenue grew 29% YoY, and operating profit grew 35%. Diluted EPS came in at 0.20. The problem is in the guidance. Based on the figures projected by the company, it looks like EPS next quarter is going to be $0.15, rather than the $0.20 expected, leading to full-year EPS of $0.60. The company has provided aggressive guidance for 30% growth in 2019, implying EPS above $0.80.

The company announced a stock buyback of $150 million, which would amount to a little less than 10% of the company’s current $1.6 billion market cap. It has close to $300 million of cash on its balance sheet, so it can execute the buyback pretty quickly if it chooses to.

Company background

GreenSky provides a technology platform allowing merchants, particularly home contractors, to offer financing options to customers. The company also is making a push into the elective healthcare space. The loans are provided by partner banks, and the company keeps a fee for originating and servicing the loan. It does not provide credit from its own balance sheet, thus limiting its risk. The company boasts an impressive 40% operating margin.

The company’s financial statements are not straightforward, featuring non-controlling interests and a tax receivable agreement liability. These are legacies from the company’s private equity ownership. I wish financial sponsors would simplify corporate structures when they take them public, rather than trying to milk them with complications like these.

The company went public in May of this year, selling shares at $23. After a small pop, shares have gradually trended down, now more than 60% off their IPO price.

Recommendation

I believe the company has a real business, with impressive margins, and a good runway for growth. It's facing some temporary issues it will work through. Although guidance for next year is a stretch, I think the company can earn in the $0.70 range per share. There's limited downside at the current $8.70 price, with support from the stock buyback. Due to the precipitous drop in the share price, implied volatility is high, and I recommend selling the $7.50 strike puts. The December expiration will fetch you $0.50. That is more than a 50% annualized return on the notional value of the options if they expire unexercised. Further out, the March expiration is going for $0.95.

If the company can successfully execute on its plans for 2019, the upside is considerable, so it definitely bears watching. Until that is clear, the shares will be somewhat in the penalty box. But you can still profit while you wait!

Disclosure: I am/we are short GSKY PUT OPTIONS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.