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Non-Tech : Auric Goldfinger's Short List -- Ignore unavailable to you. Want to Upgrade?

To: Arthur_Porcari who wrote (2470)	7/2/1999 12:49:00 PM
From: Spark	Respond to of 19428

One to watch.. Rent-A-Center (NASDAQ: RCII - Quotes, News, Boards) operates 2,096 rent-to-own stores in 49 states selling a wide range of durable goods, such as furniture and appliances. The company's acquisitive growth strategy has left it saddled with debt and goodwill, while generating weak cash flows and margins. A look at recent financial developments tells the whole story. First quarter sales rose 282% to $344.7 million, while earnings rose a mere 13% to $0.35 per share. Same store sales growth shows that the company is relying on new store openings to keep the top line going. Comparable store sales rose 8.5% versus 10% in the prior year's quarter. An 11-fold increase in intangibles, to $722.7 million, has dragged down operating margin to 12% from 15.2% in the prior year. A look at the pre-tax margin is even more alarming. Total debt, excluding $259.5 million in convertible preferred, has risen to $785 million from $14.9 million in the prior year. As a result, first quarter interest expense increased to $18.6 million from $450,000, dragging down the pre-tax margin to 6.8% from 14.8%. Operating cash flow also shows a bad trend. First quarter cash flow came in at $11.7 million, 24% below the prior year, and well below the 52% increase in net income. This drop-off in cash flow occurred despite a $39 million (240%) increase in accounts payable, a cash inflow. Rent-A-Center now has $16.2 million ($0.48 per share) in cash, more than 50% below the fourth quarter, which could soon dissipate as interest expenses and capital requirements linger. Although the industry is highly fragmented and in the process of consolidating, the likelihood of Rent-A-Center being acquired seems minimal. Rent-A-Center is the largest player in the industry with more than two times the number of stores as the second largest competitor Rent-Way (NYSE: RWY - Quotes, News, Boards). A multiple similar to that given to Rental Service in a recent bid would value Rent-A-Center's equity at 1.1 times sales, or about $30 per share (excluding $1.04 billion in debt and preferred stock). A buyout, however, seems unlikely, and we believe that Rent-A-Center's weak operating trends will lead to an erosion of shareholder value, as the acquisitive growth strategy progresses. At a recent price of $24 per share, Rent-A-Center is a clean 30% below its 52-week high. With the company in need of capital, and the stock price down from its highs, you may see some favorable research from The sell side in hopes of getting the share price up to a level sufficient to justify a secondary offering. That kind of rally would present a great opportunity to go short.