Retail Stocks

Aaron’s Inc Valuation – November 2016 $AAN

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – August 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Aaron’s Inc (AAN) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Aaron’s, Inc. is a specialty retailer of furniture, consumer electronics, computers, appliances and household accessories. The Company’s operating segments include Sales and Lease Ownership, Progressive, HomeSmart, DAMI, Franchise, Manufacturing and Others. The Company’s store-based operations engage in the lease ownership and retail sale of a range of products, such televisions, computers, tablets, mobile phones, living room, dining room and bedroom furniture, mattresses, washers, dryers and refrigerators. Its stores carry brands, such as Samsung, Frigidaire, Hewlett-Packard, LG, Whirlpool, Simmons, Philips, JVC, Sharp and Magnavox. It has approximately 2,040 stores, which consist of over 1,300 Company-operated stores in approximately 30 states, and over 730 independently owned franchised stores in approximately 47 states and Canada. DAMI serves customers that may not qualify for traditional prime lending and desire to purchase goods and services from participating merchants.

AAN Chart

AAN data by YCharts

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation.  In addition, here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

moderngraham-valuation-of-aan-november-2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $2,099,321,895 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.46 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 43.19% Pass
6. Moderate PEmg Ratio PEmg < 20 16.68 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.46 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.46 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.57 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

aan-value-chart-november-2016

EPSmg $1.74
MG Growth Estimate 0.57%
MG Value $16.76
Opinion Overvalued
MG Grade B
MG Value based on 3% Growth $25.22
MG Value based on 0% Growth $14.78
Market Implied Growth Rate 4.09%
Current Price $29.01
% of Intrinsic Value 173.06%

Aaron’s, Inc. qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position. . The Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $1.68 in 2012 to an estimated $1.74 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 4.09% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Aaron’s, Inc. revealed the company was trading below its Graham Number of $30.3. The company pays a dividend of $0.1 per share, for a yield of 0.3% Its PEmg (price over earnings per share – ModernGraham) was 16.68, which was below the industry average of 49.91, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $5.12.

Aaron’s, Inc. performs fairly well in the ModernGraham grading system, scoring a B.

Stage 3: Information for Further Research

aan-charts-november-2016

Net Current Asset Value (NCAV) $5.12
Graham Number $30.30
PEmg 16.68
Current Ratio 2.46
PB Ratio 1.46
Current Dividend $0.10
Dividend Yield 0.34%
Number of Consecutive Years of Dividend Growth 14

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Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2016
Total Current Assets $1,468,747,000
Total Current Liabilities $598,124,000
Long-Term Debt $496,170,000
Total Assets $2,551,390,000
Intangible Assets $783,829,000
Total Liabilities $1,094,294,000
Shares Outstanding (Diluted Average) 73,199,000

Earnings Per Share History

Next Fiscal Year Estimate $2.00
Dec2015 $1.86
Dec2014 $1.08
Dec2013 $1.58
Dec2012 $2.25
Dec2011 $1.43
Dec2010 $1.44
Dec2009 $1.37
Dec2008 $1.11
Dec2007 $0.97
Dec2006 $1.00
Dec2005 $0.76
Dec2004 $0.69
Dec2003 $0.49
Dec2002 $0.38
Dec2001 $0.18
Dec2000 $0.41
Dec1999 $0.37
Dec1998 $0.31
Dec1997 $0.28
Dec1996 $0.23

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $1.74
Dec2015 $1.62
Dec2014 $1.52
Dec2013 $1.70
Dec2012 $1.68
Dec2011 $1.35
Dec2010 $1.26
Dec2009 $1.13
Dec2008 $0.98
Dec2007 $0.87
Dec2006 $0.76
Dec2005 $0.60
Dec2004 $0.49
Dec2003 $0.38
Dec2002 $0.33
Dec2001 $0.30
Dec2000 $0.35

Recommended Reading:

Other ModernGraham posts about the company

Aaron’s Inc. Valuation – October 2015 Update $AAN
Aaron’s Inc. Analysis – Initial Coverage $AAN

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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