While lease to own (LTO) might not be the most glamorous business model, that doesn't mean a leading LTO company like Rent-A-Center (RCII -2.70%) can't be a good investment.
Rent-A-Center primarily leases household durable goods such as furniture and appliances to consumers on a lease-to-own basis, as well as electronics like computers, tablets, smartphones, and more. These leases typically last from 12 to 24 months, and the company makes money because the total amount paid over the course of the lease is higher than what consumers would have paid if they bought the items outright. The company has over 2,400 locations in North America, which includes 466 franchised stores and 123 locations in Mexico.
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The Rent-A-Center option
Although LTO customers ultimately pay higher prices in the long term, they wouldn't otherwise be able to afford these purchases because they lack the credit to finance them elsewhere. Rent-A-Center says that about 40% of U.S. consumers have below-average credit and that about half of consumers have less than $2,000 in their checking account. Customers can return merchandise at any time without a penalty or fee.
Is it the ultimate countercyclical investment?
Shares of Rent-A-Center are down 70% year to date. The company has lowered its outlook and indicated that the end of COVID-related stimulus payments and rising inflation have left its customers with less money in their pockets.
But there are several other emerging trends that should benefit the company. First, many LTO purchases are for necessities rather than discretionary items. For example, if someone needs a new refrigerator or washing machine, LTO provides a viable option.
Second, if the economy deteriorates and consumers continue to feel the pinch from inflation, more customers who might not have considered Rent-A-Center before could look into it for the first time. For this reason, Bank of America analyst Jason Haas calls LTO "the countercyclical subsector you ought to own," and assigns a $38 price target to Rent-A-Center, which represents about a 90% premium to its current share price.
Lastly, many retailers do not currently offer LTO, but in this situation, perhaps more would consider partnering with Rent-A-Center in order to maintain sales, which the company views as a "significant untapped opportunity."
Building a virtual presence
While Rent-A-Center might benefit from these counter-cyclical trends, it is also working to improve its own position by becoming more heavily involved in virtual LTO sales by increasing its online presence. It acquired Acima, a leading LTO platform, in 2021 to further leverage this strategy. The company has an extensive website where customers can choose items such as washer and dryer sets, set up a payment plan, and get next-day delivery.
This is a compelling option for Rent-A-Center's customer base and helps to differentiate it from peers that do not offer virtual LTO. Furthermore, it can help defend Rent-A-Center's sales from buy now, pay later (BNPL) options. While BNPL companies like Affirm are a threat, Rent-A-Center is also somewhat insulated from them because of its large physical footprint and because it does not report payment history to credit bureaus.
Overall, I think that Rent-A-Center's omnichannel presence serves it well and puts it in front of as many prospective customers as possible.
Cheap with a great dividend
After a 70% decline year to date based on the aforementioned concerns, Rent-A-Center shares now trade at a modest 16 times this year's earnings and less than four times next year's earnings projections, which is incredibly cheap.
The company clearly has some challenges, as detailed above, but these look like they are already built into the stock price and don't take into account the company's counter-cyclical potential. Meanwhile, Rent-A-Center pays out a very attractive dividend that currently yields 6.7%.
Is Rent-A-Center a buy?
Rent-A-Center is dealing with some challenges and lowered expectations, but at this point it seems that this outlook is already incorporated into the stock price. The company can benefit from some counter-cyclical economic trends in the short term, and in the long term, it is putting in the work to differentiate itself as an omnichannel LTO provider with an extensive virtual business.
With this in mind, plus a dividend yield approaching 7%, Rent-A-Center looks like a solid buy for risk-tolerant, long-term investors.
