Summary
- CONN is an American furniture, mattress, electronics and appliance store chain headquartered in The Woodlands, Texas ().
- In this post we provide a simulation-based (sim-based) valuation () of CONN.
- At the time of this writing, the company had a rather low trailing twelve months price-to-earnings ratio of 3.62.
- According to our sim-based analysis, the fair price-to-earnings ratio should be 5.46, leading to a current fair value of $13.81.
- CONN currently trades at $9.16, so it appears to be undervalued, with a potential upside of 50.76%.
- The above conservatively assumes a negative earnings growth rate. Let us say that the company manages to simply have no growth (i.e., 0% growth) in earnings for the next 5 years, instead of negative growth. In this case, our sim-based analysis suggests that the fair price-to-earnings ratio should be 7.19, leading to a current fair value of $18.20. This would mean a potential upside of 98.69%.
Conn's, Inc. (CONN)
CONN is an American furniture, mattress, electronics and appliance store chain headquartered in The Woodlands, Texas (). The company caters to credit-challenged customers, and also operates in the lease-to-own space. It has been around for a long time. It was founded in 1890 as Eastham Plumbing and Heating Company, having been renamed as Conn's in 1934.
Estimating a fair value for the stock
In this post we provide a simulation-based (sim-based) valuation of CONN. The foundation of this approach is explained in a previous post ().
At the time of this writing, the company had a rather low trailing twelve months price-to-earnings ratio of 3.62. The expected growth in earnings for the next 5 years is uncertain. Based on the most recent earnings report, when the company beat estimates, the expectation is that earnings will drop by approximately 5.55% in the near future. To be conservative, we will consider this value, of -5.55%, to be the sim-based earnings growth rate for the next 5 years.
Is the low price-to-earnings ratio of 3.62 suggestive of actual 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 5.46, leading to a current fair value of $13.81. CONN currently trades at $9.16, so it appears to be undervalued, with a potential upside of 50.76%.
Keep in mind that the above assumes a negative growth rate. Let us say that the company manages to simply have no growth (i.e., 0% growth) in earnings for the next 5 years, instead of negative growth. In this case, our sim-based analysis suggests that the fair price-to-earnings ratio should be 7.19, leading to a current fair value of $18.20. This would mean a potential upside of 98.69%.
Other pluses and minuses
The business in which CONN operates is less likely to be affected by what has been called the Amazon-driven “retail apocalypse”. Moreover, CONN 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.
Having said that, an economic downturn could lead to an increase in defaults, potentially hurting CONN’s ability to collect from its customers. One way to address this challenge would be to increase CONN’s participation in the lease-to-own space, but in a way that would allow it to operate more as a renter of its products. This seems to be a direction that CONN’s management is looking at carefully in recent quarters.
In the last two quarters, the company bought almost $100 million of its own stock, which makes sense given that the stock price has gone down so much. It has also been retiring debt at a very healthy pace, although it is still very leveraged. Last quarter, however, it issued about $8 million in debt, in part to buy its own shares – about $58 million worth of shares were purchased.
Short sellers may be interpreting the above share purchases as an attempt to prop up the stock price. The current short interest as a percentage of float is a frightening 65.96%. Still, it is hard to question the logic of buying your own shares when they are so cheap, especially given that interest rates are at their lowest point in years. If the company were to re-issue its shares at the more conservative fair value we estimated in this post, it could make a significant profit, which it could use to reduce its debt further.
There is no evidence that the company is anything but conservative in its future earnings growth projections. It has beaten earnings expectations in at least the last 10 quarters, often by a large margin.
Disclosure
The author owns CONN shares at the time of this writing.
