Rent-A-Center Inc. (RCII) is currently trading near all-time lows on a P/B basis, qualifying it as a selection of GuruFocus’ Historical Low P/B Screener. Despite the share price roughly doubling off its 2009 lows, its valuation in terms of P/B is close to breaching <1x, something it’s rarely done over the past decade. Let’s take a look at the business model, the reasons for the compression in valuation, and better ascertain whether this is a buying opportunity.
The business:
RCII is one of the largest rent-to-own (RTO) operators, with 4,594 locations across the U.S., Mexico, Canada and Puerto Rico. They essentially lease large ticket items (furniture, TVs, appliances, etc.) to consumers while giving them a buy-out option at the end of the lease.
Industry and Valuation:
As of 2014, the total RTO industry generated $9b in revenues with ~18,000 RTO locations in the U.S., Canada, and Mexico. This would imply that RCII has a roughly 25% (based on locations) to 35% (based on revenues) market share in their geographies of operation. The company pegs its share as 27.3%. The underlying industry has shown solid revenue growth since 2007 with a CAGR of 6.2%.
Most of this growth, however, has stemmed from outside the U.S., with the company’s domestic segment (77% of revenues) struggling to grow.
Domestic Revenues and Locations:
This has put pressure on the top line for RCII. Despite breakneck growth in its first decade of operation, the company has only grown at roughly industry rates over the past ten years. Total revenue growth for 2015 is guided to be 3-6%, or $3.25-3.35b. Long term, management guides for only 3-5% revenue growth, significantly below historical norms.
Management is also targeting 400bps in operating margin improvement by 2017. Operating margins have also been hit fairly hard over recent years.
This has led ROE to fall as well. Still, the company does have a long-term track record of consistently growing book value. At book value, investors would essentially earn the future ROE, currently ~7.1%.
On a DCF basis, it looks like a lot of things will have to go right for the company to make sense as an investment. If we assume the company gets its anticipated 400bps improvement in EBIT margins immediately (which would push current EPS up to ~$2.96) and also assume EPS growth rates at the high end of management forecasts, we still end up with a stock that only has 15% upside.
If we assume they get 200bps of improvement (assumed immediately which would push our estimates towards to high-end) and revenue growth rates at management's mid-point guidance, the shares look to be ~12% overvalued.
Conclusion:
While the company does have major growth opportunities in Mexico (see below), it still only represents a minority of revenues. Even assuming the high-end of management expectations, the shares still look expensive despite the attractive P/B valuation. Investors should require a bit more of a share price decline before getting interested.
See GuruFocus’ Historical Low P/B Screener for more potential investment ideas like this one.
