Rent-A-Center Stock Is Estimated To Be Significantly Overvalued
- By GF Value
The stock of Rent-A-Center (NAS:RCII, 30-year Financials) shows every sign of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $58.13 per share and the market cap of $3.2 billion, Rent-A-Center stock is estimated to be significantly overvalued. GF Value for Rent-A-Center is shown in the chart below.
Because Rent-A-Center is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 0.2% over the past five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Rent-A-Center has a cash-to-debt ratio of 0.34, which is worse than 68% of the companies in Business Services industry. The overall financial strength of Rent-A-Center is 6 out of 10, which indicates that the financial strength of Rent-A-Center is fair. This is the debt and cash of Rent-A-Center over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Rent-A-Center has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $2.8 billion and earnings of $3.73 a share. Its operating margin is 8.43%, which ranks better than 69% of the companies in Business Services industry. Overall, GuruFocus ranks the profitability of Rent-A-Center at 6 out of 10, which indicates fair profitability. This is the revenue and net income of Rent-A-Center over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Rent-A-Center is 0.2%, which ranks in the middle range of the companies in Business Services industry. The 3-year average EBITDA growth rate is 12.3%, which ranks in the middle range of the companies in Business Services industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Rent-A-Center's return on invested capital is 16.03, and its cost of capital is 10.07. The historical ROIC vs WACC comparison of Rent-A-Center is shown below:
To conclude, The stock of Rent-A-Center (NAS:RCII, 30-year Financials) appears to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Business Services industry. To learn more about Rent-A-Center stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
