Rent-A-Center (RCII - Analyst Report) operates company owned rent-to-own stores which offer high-quality, durable goods such as consumer electronics, appliances, furniture and accessories to consumers. Their flexible rental purchase arrangements allow customers to obtain ownership of the merchandise at the conclusion of an agreed-upon rental period.
In the new renting and sharing economy younger consumers are becoming more comfortable with a pay as you go system and Rent-A-Center stands to benefit from this fundamental change in trend. Instead of paying two thousand dollars for a new TV, a customer can pay $29.99 a month for a period of time and eventually own the TV if they so desire. Whether it’s a computer, dishwasher, Playstation or smartphone, Rent-A-Center allows flexibility that millennials desire.
The stock is down 20% on the year and it could be time to buy as estimate revisions are rising. The company recently became a Zack Rank #1 (Strong Buy) making the stock the Bull of the Day.
Rent-A-Center has a market cap of $600 Million with a Forward PE of 6. The stock sports a Zacks Style Score of “A” in Value and Growth and has of VGM Score of “A”. The company pays a dividend yield of 2.67%.
Over the last two years Rent-A-Center has underperformed, losing over half its value while the S&P 500 is up 7%. The company guided lower back in November of 2015, which caused the stock to tank over 25%. From there the stock saw continued selling until earnings back in February, when the stock put in a low just below $10 a share. After finding resistance twice at a bearish trendline the stock now sits at March support, if buyers step in and test the trendline again the stock could break higher.
The company reaffirmed back in September 2015, but then cut EPS guidance in November from $2.00-$2.10 verse the $2.16 expected. This was a disappointment to investors and sellers came into the stock, knocking it down over 25%.
Last quarter, the company came out with Q1 earnings at $0.48 verse the $0.40 expected, a beat of 20%. Since the report the stock fell from the $15 area to $12/share.
CEO Robert Davis went into detail on the quarter: “Q1 sales results were impacted by macro as well as company-specific headwinds, the latter of which reflect some conscious decisions to improve our profitability. We are also making significant progress with our new Acceptance Now commercial capabilities team which has already translated into a stronger pipeline of new retail partner opportunities.”
While revenue did come in a little light, it was the fifth straight EPS beat, a trend that hasn’t been rewarded by investors yet. This is creating a strong valuation case for RCII and if the EPS trends continue.
Rent-A-Center will go for another EPS beat on July 25th. Earnings estimate revisions for both fiscal year 2016 and 2017 are headed higher, suggesting the stocks earnings momentum will continue. For fiscal year 2016, estimates have gone from $1.96 to $2.05 over the last 60 days, a bump of 4.5%. For the same time period, fiscal year 2017 has seen a 4.9% jump, from $2.01 to $2.11. If Rent-A-Center can exceed these numbers as they have over the last few quarters, expect investors to wake up to their growth potential and put money to work in the stock.
Short sellers have come into this stock as of late, with 16% of the float short. This makes for short ratio of almost 12 and good news could create a massive short squeeze. It’s obvious that some professionals are betting against the company, even at these low levels. But another earnings beat and the scramble to cover will begin, leaving buyers of the stock with high returns.
Rent-A-Center is being overlooked at this price level. The valuation along with the combination of rising earnings estimates make this stock an interesting buy under $13/share. If the stock can break the bearish trendline expect new money to come in and short sellers to scramble and cover.
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