Aaron’s Inc Valuation – June 2018 $AAN

Company Profile (excerpt from Reuters): Aaron’s, Inc. (Aaron’s), incorporated on March 28, 1962, is an omnichannel provider of lease-purchase solutions. The Company engages in the sales and lease ownership and specialty retailing of furniture, consumer electronics, home appliances and accessories through its Company-operated and franchised stores in Canada, as well as its e-commerce platform, Aarons.com. The Company’s segments include Sales and Lease Ownership, Progressive Finance Holdings, LLC (Progressive), Dent-A-Med, Inc., doing business as the HELPcard (DAMI), Franchise and Manufacturing. Its stores carry brands, such as Samsung, Frigidaire, Hewlett-Packard, LG, Whirlpool, Simmons, Philips, Ashley and Magnavox. As of December 31, 2016, the Company had 1,864 Aaron’s stores, consisted of 1,165 Company-operated stores in 28 states, the District of Columbia and Canada, and 699 independently-owned franchised stores in 46 states and Canada. The Company owns or has rights to various trademarks and trade names used in its business, including Aaron’s, Aaron’s Sales & Lease Ownership, Progressive, Dent-A-Med, the HELPcard and Woodhaven Furniture Industries.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of AAN – June 2018

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 $2,863,035,408 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.56 Fail
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 117.69% Pass
6. Moderate PEmg Ratio PEmg < 20 14.17 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.67 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 1.56 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 2.47 Fail
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 $2.87
MG Growth Estimate 13.37%
MG Value $101.20
Opinion Undervalued
MG Grade A-
MG Value based on 3% Growth $41.63
MG Value based on 0% Growth $24.41
Market Implied Growth Rate 2.84%
Current Price $40.70
% of Intrinsic Value 40.22%

Aaron’s, Inc. qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. 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 Undervalued after growing its EPSmg (normalized earnings) from $1.52 in 2014 to an estimated $2.87 for 2018. This level of demonstrated earnings growth outpaces the market’s implied estimate of 2.84% 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 above the price.

At the time of valuation, further research into Aaron’s, Inc. revealed the company was trading below its Graham Number of $42.55. The company pays a dividend of $0.11 per share, for a yield of 0.3% Its PEmg (price over earnings per share – ModernGraham) was 14.17, which was below the industry average of 37.1, 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 $-7.75.

Aaron’s, Inc. fares extremely well in the ModernGraham grading system, scoring an A-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$7.75
Graham Number $42.55
PEmg 14.17
Current Ratio 1.56
PB Ratio 1.67
Current Dividend $0.11
Dividend Yield 0.28%
Number of Consecutive Years of Dividend Growth 15

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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2018
Total Current Assets $404,385,000
Total Current Liabilities $259,476,000
Long-Term Debt $358,519,000
Total Assets $2,719,009,000
Intangible Assets $857,046,000
Total Liabilities $962,817,000
Shares Outstanding (Diluted Average) 72,018,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $3.26
Dec2017 $4.06
Dec2016 $1.91
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

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.87
Dec2017 $2.48
Dec2016 $1.71
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

Recommended Reading:

Other ModernGraham posts about the company

Aaron’s Inc Valuation – November 2016 $AAN
Aaron’s Inc Valuation – May 2016 $AAN
Aaron’s Inc. Valuation – October 2015 Update $AAN
Aaron’s Inc. Analysis – Initial Coverage $AAN

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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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