Should You Think About Buying Rent-A-Center, Inc. (NASDAQ:RCII) Now?

By
Simply Wall St
Published
April 20, 2022
NasdaqGS:RCII
Source: Shutterstock

Rent-A-Center, Inc. (NASDAQ:RCII), is not the largest company out there, but it received a lot of attention from a substantial price movement on the NASDAQGS over the last few months, increasing to US$46.57 at one point, and dropping to the lows of US$23.84. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether Rent-A-Center's current trading price of US$26.12 reflective of the actual value of the small-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Rent-A-Center’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

Check out our latest analysis for Rent-A-Center

What's the opportunity in Rent-A-Center?

The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Rent-A-Center’s ratio of 11.43x is trading slightly above its industry peers’ ratio of 7.6x, which means if you buy Rent-A-Center today, you’d be paying a relatively sensible price for it. And if you believe that Rent-A-Center should be trading at this level in the long run, then there should only be a fairly immaterial downside vs other industry peers. Is there another opportunity to buy low in the future? Since Rent-A-Center’s share price is quite volatile, we could potentially see it sink lower (or rise higher) in the future, giving us another chance to buy. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.

What kind of growth will Rent-A-Center generate?

earnings-and-revenue-growth
NasdaqGS:RCII Earnings and Revenue Growth April 20th 2022

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. Rent-A-Center's earnings over the next few years are expected to double, indicating a very optimistic future ahead. This should lead to stronger cash flows, feeding into a higher share value.

What this means for you:

Are you a shareholder? RCII’s optimistic future growth appears to have been factored into the current share price, with shares trading around industry price multiples. However, there are also other important factors which we haven’t considered today, such as the track record of its management team. Have these factors changed since the last time you looked at RCII? Will you have enough confidence to invest in the company should the price drop below the industry PE ratio?

Are you a potential investor? If you’ve been keeping an eye on RCII, now may not be the most advantageous time to buy, given it is trading around industry price multiples. However, the optimistic forecast is encouraging for RCII, which means it’s worth further examining other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.

With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. At Simply Wall St, we found 5 warning signs for Rent-A-Center and we think they deserve your attention.

If you are no longer interested in Rent-A-Center, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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