Rent-A-Center Could Get a Boost From Credit Squeeze

The current tightening of consumer credit and spending could not only spur a shift to discount stores such as BJ's Wholesale (BJ - commentary - Cramer's Take), it could also influence the way goods are purchased.

One manifestation of this could be a shift from buying on credit toward the rent-to-own market. If so, the way to play the trend is most likely Rent-A-Center (RCII - commentary - Cramer's Take).

With more than 3,000 stores and a 36% market share, Rent-A-Center is the largest rent-to-own operator in the U.S. Historically, rent-to-own stores have primarily served customers who have household income of less than $50,000 a year. However, a generally tighter credit market could expand that base into slightly higher income categories.

Background on a Bargain

Beginning in 1993, Rent-A-Center expanded dramatically, primarily by acquisition. The industry remains highly fragmented, aside from the two largest operators, and additional acquisitions are likely. However, the rapid expansion caused some markets to become oversaturated.

In early 2007 the stock peaked at $31 a share before a legal settlement and the saturation issues took the wind out of its sails. Later in 2007, the company closed 369 of its stores, and the stock now appears to be getting its mojo back, recovering from a low near $12 earlier this year.

The current $21 share price is just 9.4 times the consensus current-year earnings expectations and 8.9 times the estimate for 2009 earnings. Sometimes multiples that low indicate a belief that the estimates will fall. However, the consensus estimates for Rent-A-Center have been doing exactly the opposite. Over the last 90 days, the 2008 estimate has been revised upward by 3 cents and the 2009 estimate by 2 cents. The earnings appear to be relatively high quality, as the accrual ratio indicates a difference of less than 4% between cash earnings and accounting earnings.

Tightening the Ship

On the company's year-end conference call, President Mitchell Fadel said that Rent-A-Center is responding to the economic slowdown by focusing on the things they can control: "execution of our consolidation plan; controlling our delinquencies which are now back where they need to be; controlling of our inventory levels which is clearly in the right direction."

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At the time of publication, Trent had no position in the companies mentioned, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.