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 trailing twelve months price-to-earnings ratio of 7.83.
- According to our sim-based analysis, the fair price-to-earnings ratio should be 15.30, leading to a current fair value of $49.25.
- CONN currently trades at $25.20, so it appears to be undervalued, with a potential upside of 95.44%.
- The above conservatively assumes a positive earnings growth rate of 15%, about half of the average for specialty retail companies.
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 rename 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.
At the time of this writing the company had a profit margin of 6.9% and a price-to-sales ratio of 0.53. The expected growth in earnings for the next 5 years is uncertain; but recent trends are very encouraging. To be conservative, we will assume a positive earnings growth rate of 15%, which is about half of the average for specialty retail companies, to be the sim-based earnings growth rate for the next 5 years.
The table below summarize our sim-based results.
Since our sim-based analysis uses a S&P 500 return as a basis, our results summarized on the table above suggest the following fair values – stock price: $49.25, and price-to-earnings ratio: 15.30. At the time of this writing, CONN trades at $25.20, so it appears to be undervalued, with a potential upside of 95.44%. In fact, the company seems to be quite undervalued at the moment, even though its shares gained more than 200% in value in the last 12 months.
Final thoughts
A little over a year ago, we conducted a sim-based analysis of CONN, which suggested a fair value of $18.20. Why the much higher fair value now? The reason is expected future yearly earnings growth, which we assumed to be of 15% in this post’s sim-based analysis. A little over a year ago, the expectation was of negative or no earnings growth, based on forward guidance provided by the company.
CONN’s guidance tends to be conservative. Based on that, and other factors, the forward predicted price-to-earnings ratio is at the moment estimated to be 10.43, which does not look very good compared to the trailing twelve months price-to-earnings ratio of 7.83. However, the most recent price-to-cash flow ratio is about 3.36, and this ratio is often a good estimate of the forward price-to-earnings ratio. This supports our valuation.
Disclosure
The author owns CONN shares at the time of this writing.
