Sunday, February 8, 2009

Aaron's Rents Is Worth A Nibble In Bad Times

Tough times are prosperous times for rent-to-own companies. Rent-to-own companies are low-end banks. They provide furniture, appliances, and electronics to those that have credit issues or are turned off by the established credit industry. Customers are generally lower income earners that know that they will get into financial difficulty, again, at some time and like the flexibility of returning the merchandise that they are renting as opposed to the embarrassment  and frustration of suits and repossessions. They are willing to pay higher prices for flexibility, such as the return privilege, weekly payments, and the possibility of eventual ownership if they can maintain their financial stability. 

Aaron's is the second largest RTO company, after Rent-A-Center, in the country. It recently sold it's Rent-To-Rent  division, furniture rentals to corporations and relocating business people, and is now solely RTO. The combination was confusing to Wall Street. In a past life I owned 25 RTO stores that did about one-third of their business in RTR with the balance being RTO. I always thought it was good diversification as one arm was high risk/high return and the other was low risk/low return which produced a good result. When I sold the company to a NYSD RTO company they didn't get excited about the RTR part. It's probably good that Aaron's has simplified their structure. Analysts will find their numbers easier to understand.

Proof that they excel in tough times is  supported by RNT recently raising 2009 guidance to around $1.80 eps. Not many companies are willing to increase guidance in a recession. It all depends on the multiple that the Street puts on RNT, but your stock price isn't going to go down because of falling profits. Profits will grow and it is likely that the market will pile into the company as a safe haven. I believe there is some upside from here. If the "safe have' premium gets anywhere near the intensity of the for profit education industry stocks, then the upside is large. 

Aaron's has always been conservatively run, for a RTO company, and avoided industry problems that develop every couple of years. Accounting irregularities nearly killed RentWay the company that bought my stores and was ultimately purchased by RCII. RNT has sold the RTR division to Warren Buffett's Cort Funiture Rental and is repurchasing franchised stores. They currently operate about 1000 company owned and 500 franchised outlets. They also manufacture furniture and bedding for their own use. A distinct advantage and different than most RTO competitors.

The company's balance sheet isn't pristine, but it isn't overextended either. They have about $150 million of long term debt, but that represents a low percentage of capital and they easily cover their debt service. The risk in RTO companies is in the collection area and Aaron's  has always had a good handle on this area. 

Today you can buy 2009 earnings of between $1.70 and $1.85 for $24.66.  That's a forward P/E of about 14, not cheap, but the E isn't likely to be decreased and therefore the share price won't fall for that reason. Growth should be positive so the multiple should hold relative to other stocks. RNT offers an opportunity to have share price appreciation in 2009.

RTO is a low end bank, but, come to think of it, it may be better than its more socially acceptable commercial banking brethren. Nationalization isn't in the cards and RNT and RCII don't need TARP funding to augment capital. They make money and that may be rare this year. A gain here may offset some losses and help hold net worth together.




2 comments:

prophets said...

William:

I started doing a little work on RNT. I'm a little late the story, and kind of put it aside as the stock has meandered here in the mid/low 20's. I have a couple questions and would be curious to get your opinion:

1) What do you think the average return on investment is for the merchandise at a RNT store?

The return on assets of the rent to rent unit was a low 4-5%, and the RTO business is clearly higher, but it is obscured by the constant asset build (new stores).

2) What do you think the rise in unemployment will mean for RNT? What is the trade-off here (as specific as possible) between the increase in bad debt/repo of merchandise and the expansion in new customers (people who can't get credit) ?

3) If you were to own a RTO store... what do you think the fair price is of the assets? (ie. if all the merchandise, stores, etc. have a book value of $100, what do you think is a fair price.. 1.5x? 1.3x? 2.0x?)

enjoyed your note... I may ramp up more serious due diligence on RNT depending on earnings.

hope all is well

- pro

The Crusty Credit Analyst said...

prophets:

The return on RTO assets is excellent if operated properly. The high rental rates are high for a purpose. Companies need to not only absorb losses from repayment, but also refurbishing returned merchandise, collection and delivery expense, and normal retail expenditures. In spite of the additional costs, if done conservatively, it can be a very good business as the customers like the experience and do not like shopping in retail stores.

The economy will help as more people move into the non-credit market.

Like any business you need to look at what it throws off in cash and if the business is being run for the long haul. If so, pick your multiple and you would probably do well.

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