Rent-A-Center, Inc. (RCII) fourth quarter results were ahead of our estimates, and management's guidance for fiscal year 2008 was also above its previous guidance. The upside to its 2008 EPS guidance will come from cost savings associated with the company closing 280 stores. We bumped up our 2008 EPS estimates to reflect the store closings and established 2009 estimates.
With the stock trading around 8x our 2008 EPS, the downside risk should be muted even if the company falls short of its earnings guidance. Even so, we maintain our Hold rating because the weak consumer spending environment is not likely to improve for several quarters.
Our target price of $18.25 is about 8.5x our 2008 EPS estimate, which is a slight discount to the company's long-term growth rate. RCII shares are trading at 8.3x our 2008 EPS estimate. This valuation looks cheap, but we think it reflects the problems associated with the company's core customer base. We maintain our Hold rating and expect RCII shares to track the overall market for the next six months.
Read the full analyst report on RCII.
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