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 Most Undervalued Companies for the Defensive Investor – October 2015. 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. (Aaron’s) is a specialty retailer of furniture, consumer electronics, computers, appliances and household accessories. The Company operates through five segments: The Aaron’s Sales and Lease Ownership segment, which offers furniture, electronics, appliances and computers to consumers on a monthly payment basis; Progressive, which is a virtual lease-to-own company that provides lease-purchase solutions; The HomeSmart segment, which offers furniture, electronics, appliances and computers to consumers on a weekly payment basis; Franchise, which awards franchises and supports franchisees of its sales and lease ownership concept, and Manufacturing segment, which manufactures upholstered furniture and bedding for use by Company-operated and franchised stores. Its products include flat-screen televisions, computers, tablets, living room, dining room and bedroom furniture, among others. Its brands include Samsung, Frigidaire, Hewlett-Packard, LG, Maytag, RCA and JVC.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of AAN – October 2015
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 | $2,486,532,265 | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 2.30 | 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 | 56.49% | Pass | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 19.93 | Pass | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 1.90 | Pass | |
| Score | ||||
| 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 | 2.30 | Pass | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 0.70 | 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
| EPSmg | $1.72 |
| MG Growth Estimate | 4.14% |
| MG Value | $28.87 |
| Opinion | Overvalued |
| MG Value based on 3% Growth | $24.93 |
| MG Value based on 0% Growth | $14.61 |
| Market Implied Growth Rate | 5.71% |
| Current Price | $34.26 |
| % of Intrinsic Value | 118.69% |
Aaron’s Inc. qualifies for both the Enterprising Investor and the more conservative Defensive Investor.  The company passes all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.
As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.35 in 2011 to an estimated $1.72 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 5.71% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Aaron’s Inc. (AAN)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | $2.86 |
| Graham Number | $29.70 |
| PEmg | 19.93 |
| Current Ratio | 2.30 |
| PB Ratio | 1.90 |
| Dividend Yield | 0.26% |
| Number of Consecutive Years of Dividend Growth | 10 |
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| ModernGraham tagged articles | Morningstar |
| Google Finance | MSN Money |
| Yahoo Finance | Seeking Alpha |
| GuruFocus | SEC Filings |
Most Recent Balance Sheet Figures
| Total Current Assets | $1,246,116,000 |
| Total Current Liabilities | $542,760,000 |
| Long-Term Debt | $494,858,000 |
| Total Assets | $2,354,707,000 |
| Intangible Assets | $818,140,000 |
| Total Liabilities | $1,037,618,000 |
| Shares Outstanding (Diluted Average) | 72,965,000 |
Earnings Per Share History
| Next Fiscal Year Estimate | $2.16 |
| Dec14 | $1.08 |
| Dec13 | $1.58 |
| Dec12 | $2.25 |
| Dec11 | $1.43 |
| Dec10 | $1.44 |
| Dec09 | $1.37 |
| Dec08 | $1.11 |
| Dec07 | $0.97 |
| Dec06 | $1.00 |
| Dec05 | $0.76 |
| Dec04 | $0.69 |
| Dec03 | $0.49 |
| Dec02 | $0.38 |
| Dec01 | $0.18 |
| Dec00 | $0.41 |
| Dec99 | $0.37 |
| Dec98 | $0.31 |
| Dec97 | $0.28 |
| Dec96 | $0.23 |
| Dec95 | $0.04 |
Earnings Per Share – ModernGraham History
| Next Fiscal Year Estimate | $1.72 |
| Dec14 | $1.52 |
| Dec13 | $1.70 |
| Dec12 | $1.68 |
| Dec11 | $1.35 |
| Dec10 | $1.26 |
| Dec09 | $1.13 |
| Dec08 | $0.98 |
| Dec07 | $0.87 |
| Dec06 | $0.76 |
| Dec05 | $0.60 |
| Dec04 | $0.49 |
| Dec03 | $0.38 |
| Dec02 | $0.33 |
| Dec01 | $0.30 |
| Dec00 | $0.35 |
| Dec99 | $0.30 |
Recommended Reading:
Other ModernGraham posts about the company
Aaron’s Inc. Analysis – Initial Coverage $AAN
Other ModernGraham posts about related companies
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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