Rent-A-Center (RCII), mcap=$1.2bn, price $21.11 vs $23.50

– Lease-to-own business at 7x normalized/conservative earnings.
– Sells through own B&M stores as well as partner’s stores/websites (VTLO).
– Recently shares lost half of their value driven by:
(1) higher loss rates in the core B&M business as well as
(2) underwriting issues at the VTLO segment.
– The loss rate reversion to pre-covid levels was expected as stimulus effects subsided.
– VTLO underwriting losses were due to poor execution but are likely to be in the back window already after remediation steps were taken.
– Large WC unwind expect to result in massive FCF for the year ($400m or 15% of EV).
– Conservative assumptions indicate 50-100%upside.

– With conservative assumptions RCII would earn $3.5/share this year, putting it at 7x PE.
– B&M peers typically trade at 10-20x earnings.
– A more optimistic scenario delivers earnings of $5/share.

Exp. gain: +50-100% to $35-50/share this year.

Full RCII write-up (free guest account required):

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