Overlooking the Potential in Aaron Rents?
In the search for stocks that have the potential to benefit from a protracted recession, we want to highlight an undervalued stock in the rent-to-own segment. Aaron Rents (RNT), an Atlanta based company, is being pummeled today, down more than 16% as of this post. This appears to be in reaction to the earnings guidance issued today by its closest competitor Rent-A-Center (RCII), who reported fairly weak earnings, but whose guidance shook the market. Rent-A-Center’s lowered guidance is a result of the current financial distress according to its Chairman and CEO who said, “While we believe the economic environment creates opportunities for potential customers whose available credit is diminished or eliminated, it is creating challenges for our existing customers.” The company also took a serious hit from the impact of hurricane’s Gustav and Ike.
Rent-A-Center was the company that predicted a rocky immediate future, but Ockham senses opportunity in the stock of its closest competitor, Aaron Rents. Up until about a month ago, RNT was one of the market’s star performers—up more than 50% for the first three quarters of the year. However, during the market’s brutal month of October, the stock has lost 45% of that gain. It seems to me that the market liked the way Aaron Rents was positioned to take advantage of cash strapped consumers up until recent market action virtually eliminated positive annual returns for all stocks. Most analysts are expecting a rough Christmas season for the retail sector, but rent-to-own companies have the look and feel of a retail operation while really being a hedge against it. When their washing machine breaks, are struggling consumers more likely to rent than buy outright at present?
An industry magazine RTOHQ published a good article yesterday about the increased interest financial analysts have had in these stocks based on current economic turmoil. From the article,
“{Richard} May described industry trends and pricing structure changes over the last five years — such as 90-days same as cash and 12-to-own — are helping to expand the traditional RTO customer base.
“That has definitely attracted that more financially stable monthly customer,” Mays says. “In the past, our demographic has been narrowly defined. What we’re seeing today is dealers really reaching out to new customers through innovative pricing and marketing.”
As consumer credit remains scarce, customers as well as investors are giving rent-to-own a second look as an alternative financing mechanism for acquiring products May says.
“And that’s exactly what we want,” he says. “Now that the price of gas is back down, the dynamics of this economy are definitely in our favor.”
As for Aaron’s valuation, we believe that the recent selloff has definitely increased the attractiveness of shares. We have it rated as “Undervalued” but we will likely upgrade to “Greatly
Undervalued” to take into account the 16% decline that the stock has experienced since our ratings were updated after last Friday’s close. Both price-to-sales and price-to-cash flow are well below their historical averages over the last ten years. So, we see a company that might be able to increase its business from consumers seeking out credit opportunities they might not have needed in years past. Although the company may experience more defaults than normal, the increased business is more valuable in the long run. For another idea in this space, check out Rentrak Corp (RENT) this stock is “Undervalued” as well but has not been materially affected by the market’s reaction to RCII. We have made all three companies’ research reports available to registered users of our website for the next week.
Ockham Research Staff @ October 28, 2008
