Wednesday, July 22, 2009

Instead of Rent-To-Own, the Market Makes AAN a Gift-To-Own

It occassionally happens and you have to take advantage when it occurs. A market over reaction is a gift and gifts goose results. Assuming that the market had AAN's priced efficiently yesterday at approximately $31.50, then today's $4.50 drubbing can only be attributed to Aaron's earnings release. Sellers didn't like what they saw and sold in volume.

What was it that they didn't like? The only negative present, and I don't consider it important, was that revenue at franchisee's stores were down a modest amount. The company attributed that decline to fewer early payouts compared to last year when the Bush stimuus checks put some extra money in the pockets of Aaron's RTO customers. So, revenue was down at franchisees. Not company stores, and there are twice as many company stores, nor same store sales, nor earnings.

What was positive in the report Let's start with quarterly eps of .51 vs. concensus of .44. Net income from continuing operations was up41% for the first 6 months and eps grew 29%. The quarterly numbers were similiar. Revenue was 891MM vs. 799MM and same store sales for stores open one year were up 8% and 2 year SSS were up 5%. In down economies RTO companies can do very well and AAN is validating that premise.

Looking forward for the last 6 months, the company RAISED guidance from $1.90-2.05 to $1.95-2.05. Growth of both revenue and profit. You don't hear that combination much lately.

The balance sheet remains strong with $85MM of cash, only 2MM of bank debt, and $50MM of long term senior debt. Equity stands at 836MM. AAN even pays a small dividend.

Todays sellers had buyers. The buyers were investors that actually read the earnings release and understood what they read. The share price will rebound as the sell off was over done.

In addition to the position that I already own, today I bought call options for August and September. The $25 strike cost me a modest premium, but I expect to get that back, plus more soon.

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