Still Lots of Money to Be Made Renting Household Goods

It is an interesting time in the markets and the economy. Unemployment remains near historic lows and consumers by and large has access to cash and credit to spend when they want to. There is a whole sub-economy of people, some with good credit and some with bad, that prefers to rent rather than own — and that goes beyond just houses and cars. It turns out that renting household durable goods like furniture, appliances and even electronics is a big business.

Rent-A-Center Inc. (NASDAQ: RCII) is one of the leaders in the renting and rent-to-own markets. The company has reported its second-quarter results for 2019, showing revenue and earnings growth after its consolidated same-store sales increased by 5.8%. The company also recently completed the refinancing of its credit facility, and after the redemption of outstanding senior notes its outstanding debt of $280 million has been almost cut in half.

Things are good enough at Rent-A-Center that the company’s board of directors just approved the initiation of a quarterly $0.25 per share cash dividend for its shareholders. What should stand out here is that the dividend just launched comes with close to a 4% dividend yield, and the $1.00 in annualized per share payouts is not quite 50% of the company’s expected earnings per share in 2019 and even a lower percentage than expected 2020 earnings per share.

With a gain of about 1% to $25.30 so far after earnings, Rent-A-Center shares have a 52-week range of $11.98 to $28.25. The consensus analyst target price from Refinitiv was also up at $27.17.

One firm believes that Rent-A-Center shares are set to rise much more. Janney’s John Rowan has upgraded Rent-A-Center shares to Buy from Neutral and raised his target (fair value) to $32 from $29. For the record, this new and higher target price is $1.00 above the prior street-high target of $31.

While the reported earnings of $0.60 per share blew away the expectations for $0.52 from the firm (and $0.55 consensus), Janney’s report indicated that much of the improved performance has come from cost-cutting initiatives as its total consolidated revenue is roughly flat. Janney noted that revenue is down 3% over the past two years, compared to a decrease in operating expenses of nearly 10%. The report further added:

Management has done a fine job in improving the retail results of Rent-A-Center, while cutting costs and delivering significantly improved operating results… Merchants Preferred remains a relatively small player in the virtual Rent-to-Own space; management, however, divulged some additional details of the company on today’s call. Merchants Preferred has revenue of $80 million and is marginally profitable. This is a strategic acquisition for Rent-A-Center, as Merchants Preferred is scalable. There are also synergy opportunities here, as Merchants Preferred can use Rent-A-Center’s core stores to dispose of returned goods versus an ad-hoc network of online sales and liquidators. Lastly, Merchants Preferred is now capital constrained, which will clearly be alleviated post acquisition.

Janney’s street-high target of $32 now aims for more than 26% upside to the price target, or about 30% if you include the dividends for total return investors. That is upside of roughly thrice the traditional 8% to 10% being targeted by analysts in most established companies that have long operating histories. And speaking of histories, Rent-A-Center shares hit $40.00 very briefly all the way back in 2013, and the company has been public since the mid-1990s.

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