Earnings Reaffirm Rent-A-Center Stock’s Lease on Life

Rent-A-Center (NASDAQ:RCII) surged higher following the release of fourth-quarter and full-year earnings. The Plano, Texas-based rent-to-own company reported higher profits and revenues than Wall Street had expected. This sent RCII stock price soaring higher in morning trading.

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Now, with its takeover canceled and profits returning, RCII stock gets a second chance. Given the rising profit growth, Rent-A-Center stock should continue its move higher, at least for now.

RCII Beat Quarterly and Yearly Estimates

Rent-A-Center reported fourth-quarter earnings of 35 cents per share. This came in well ahead of the 20 cents per share Wall Street had predicted. Revenues of $661.8 million also beat the expected $656.78 million analysts had predicted. The company lost 41 cents per share in the same quarter last year on $638.95 million in revenue.

RCII reported full-year 2018 earnings of $1.06 per share, 14 cents per share ahead of the expected 92 cents per share. On the revenue side, the company brought in just over $2.66 billion, slightly beating the $2.65 billion predicted by Wall Street.

For 2019, the company offered mixed guidance. Rent-A-Center expects to bring in between $2.59 billion and $2.63 billion in 2019. Wall Street had forecasted $2.62 billion. The company also expects earnings between $1.75 and $2.15 per share. Analysts had previously anticipated profits of $1.77 per share.

RCII Moves Higher Following Termination of Takeover

The RCII stock price saw little movement for much of the year. In June, an agreement among affiliates of Vintage Capital Management LLC to acquire the company for $15 per share left the stock with few catalysts. However, Rent-A-Center called off the deal in December. Both RCII and Vintage remain in litigation over the fallout from the termination. However, RCII trades higher than the $15 per share Vintage agreed to pay for the company.

The decision to remain independent and public continues amid long-time struggles. The stock has suffered through a multi-year decline since it peaked in 2013 at just over $40 per share. RCII stock fell behind its most direct peer, Aaron’s (NYSE:AAN), and its market cap tumbled below $1 billion. The company also found itself in competition with much larger retailers such as Walmart (NYSE:WMT) and Best Buy (NYSE:BBY), who also offer rent-to-own options.

Valuation Appears Cheap, but be careful

However, earning $1.06 per share for 2018 after a loss the previous year shows the company has turned a corner. This return to positive earnings indicates that the stock could rise over time. As a result, the forward price-to-earnings (P/E) ratio stands at about 10.6, and higher guidance could reduce the multiple further.

Still, the P/E ratio may look deceptively cheap. Over the next five years, Wall Street expects profit growth to fall to an average of 5% per year. Moreover, Vintage Capital’s lawsuit against RCII remains unresolved. If the court rules against Rent-A-Center, prepare for a temporary disruption in the growth of RCII. I still see RCII stock growing in the near term. However, I remain unconvinced that the stock will return to the $40-plus-per-share record high anytime soon.

The Bottom Line on RCII Stock

Profit growth and the recent earnings beat positions RCII stock—at least for now. Rent-A-Center stock moved higher in morning trading as the firm beat earnings and revenue estimates for both the previous quarter and 2018. Further, forward guidance indicates profits could soar much higher than expected in 2019.

Terminating its takeover by Vintage Capital appears to have led to legal troubles. However, with the stock moving well ahead of the $15 per share merger price, Rent-A-Center appears positioned to again prosper as a standalone company. Moreover, a low P/E ratio combined with a near doubling of profits for 2019 could take RCII stock higher for now.

Still, investors should keep expectations in check. Analysts think profit growth will slow to single-digit levels in future years. Further, with a market cap around $1 billion, it still must compete with large and mega-cap retailers with their own rent-to-own segments. Also, investors should prepare for any fallout coming from Vintage Capital’s lawsuit against RCII.

Nonetheless, RCII stock has returned to profitability. Although it may not return to its all-time high anytime soon, it should continue to move higher for the foreseeable future.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

Article printed from InvestorPlace Media, https://investorplace.com/2019/02/earnings-beat-lease-life-rcii-stock/.

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