Summary
- AAN is a lease-to-own retailer headquartered in Atlanta, Georgia ().
- At the time of this writing the company had a trailing twelve months price-to-earnings ratio of 21.
- Our simulation-based valuation suggests a fair price-to-earnings ratio of 23.93, leading to a current fair value of $70.18.
- AAN currently trades at $61.58, so it appears to be undervalued, with a potential upside of 13.97%.
- If the growth in earnings is what analysts are currently expecting, namely around 30%, our potential upside may be significantly underestimated. In that case, the fair value of the stock would be $94.96.
Aaron's, Inc. (AAN)
AAN is a lease-to-own retailer headquartered in Atlanta, Georgia (). It focuses on leases and retail sales of furniture, electronics, appliances, and computers. Its acquisition of Progressive Finance in 2014 positioned AAN as the leader in the rent-to-own (RTO) industry, which helps credit-challenged customers gain access to goods they would have otherwise been unable to afford.
Estimating a fair value for the stock
In this post we provide a simulation-based (sim-based) valuation () of AAN.
At the time of this writing the company had a trailing twelve months price-to-earnings ratio of 21. The expected growth in earnings for the next 5 years is a high 21.50%. Even though it is high, this growth number may be an underestimation given the current spread in estimates for trailing and forward price-to-earnings ratios: 21 and 14.3. To be more consistent with this spread, we will consider the value of 23.89% to be the sim-based earnings growth rate for the next 5 years.
Is the price-to-earnings ratio of 21 suggestive of undervaluation? As you can see in the table below, the answer to this question seems to be “yes”. Since our sim-based analysis uses a S&P 500 return as a basis, the fair price-to-earnings ratio should be 23.93, leading to a current fair value of $70.18. AAN currently trades at $61.58, so it appears to be undervalued, with a potential upside of 13.97%.
Is the fair price-to-earnings ratio of 23.93 too high?
Could the fair price-to-earnings ratio estimated above, of 23.93, be too high? Arguably the answer is “no”, because of the expected growth in AAN’s earnings (see: ). In fact, if the growth in earnings is what analysts are currently expecting, namely around 30%, our potential upside may be significantly underestimated. In that case, the fair value of the stock would be $94.96.
Other pluses and minuses
AAN is not leveraged. The sum of its cash (and equivalents) and its EBITDA (earnings before interest, taxes, depreciation, and amortization) is higher than the company’s debt. Its dividend is not very attractive at the moment, at 0.26%, but the current payout ratio is a low 4.81%. This means that the dividend could be easily raised. In the meantime, the company seems to be using its available cash for other purposes that have a positive impact on earnings, including share buybacks – justified base on AAN’s current relatively low valuation.
The business in which AAN operates is less likely to be affected by what has been called the Amazon-driven “retail apocalypse”. Moreover, AAN can be seen as a somewhat defensive stock in the case of an economic downturn, since it primarily caters to credit-challenged customers. When the economy slows down, the number of credit-challenged individuals usually goes up.
Disclosure
The author owns AAN shares at the time of this writing.
