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Analyst Blog

On Oct 31, we downgraded our long-term recommendation on Rent-A-Center Inc. (RCII - Analyst Report), one of the largest rent-to-own operators, to Underperform following the company’s dismal operating performance during third-quarter 2013 that led management to lower its full-year earnings projection. The stock currently carries a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Estimates for Rent-A-Center have shown a downtrend since the company reported disappointing third-quarter results on Oct 21, 2013. The quarterly earnings of 51 cents a share missed the Zacks Consensus Estimate of 63 cents, and fell 23.9% from the prior-year quarter. Total revenue grew 2.1% to $754.8 million but fell short of the Zacks Consensus Estimate of $773 million.

Comparable-store sales for the quarter dropped 0.8%, reflecting a 5.1% decline in the Core U.S. segment.

The sustained deflation in electronic products along with promotions undertaken to attract budget constrained consumers led to the year-over-year decline in average revenue per agreement and is the principal factor behind the drop in comparable-store sales and trim in the guidance.

Management now envisions 2013 earnings in the band of $2.80 to $2.85 per share, including a cost of 30 cents related to its international expansion initiatives. Earlier, management had projected 2013 earnings between $3.03 and $3.15 per share.

Consequently, we are witnessing a fall in the Zacks Consensus Estimate, as analysts become less constructive on the stock’s future performance. The Zacks Consensus Estimate for fiscal 2013 fell by 9% to $2.83 and for fiscal 2014 it tumbled by 6% to $3.30 per share, over the past 30 days.

Other Stocks that Warrant a Look

Other stocks worth considering in the finance-leasing industry are Apollo Investment Corporation (AINV - Snapshot Report) carrying a Zacks Rank #1 (Strong Buy), and Capital One Financial Corp. (COF - Analyst Report) and First Cash Financial Services Inc. (FCFS - Snapshot Report) both holding a Zacks Rank #2 (Buy).

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