Does One of These Renters Belong in Your Portfolio?

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the majority of cases, I would much rather be the person collecting rent than paying it. Paying to use something, while never gaining any equity in it, seems like a bum rap to me. However, there are two companies worth examining with business models centered around the rent-to-own concept.

America's top two rent-to-own companies

The rent-to-own industry is highly consolidated. According to Aaron's (NYSE: AAN) it, and its slightly larger competitor, Rent-A-Center (NASDAQ: RCII) combined operate 62.8% of rent-to-own stores in America and Canada.

Both of these companies offer rent-to-own agreements for a variety of products including furniture, consumer electronics, household appliances, and accessories. 

Currently, these companies have market caps that are very close to one another, making investment comparisons a fairly easy task. Aaron's is currently valued at $2.2 billion, Rent-A-Center at $2.3 billion. Which company appears more attractive right now? Let's examine some data to figure that out.

      Aaron's       Rent-A-Center   
Sales 2012:     $2.22 billion        $3.08 billion
Sales 4-Year CAGR:        8.7%           1.7%
     

Net Income 2012:

     $173 million        $183.5 million
Net Income 4-Year CAGR:       17.7%           7.1%
     
Dividend Yield:          0.2%           2.1%
First Dividend:  11/29/2000         8/26/2010
     
Return on Equity (TTM):       13.63%          12.24%
Return on Equity 5-Year Average:       13.39%          13.24%
Net Profit Margin (TTM):        6.9%           5.8%
Net Profit Margin 5-Year Average:        6.4%           5.8%
     
Working Capital:    $799.3 million        $472.1 million
Shareholder's Equity:    $1.2 billion        $1.49 billion
Price-To-Tangible-Book Ratio:       2.32          16.38

In 2012, Rent-A-Center barely generated more net income, yet had a lot more sales. It has also been growing much slower than Aaron's. The only trait of Rent-A-Center I liked was its dividend.

Aaron's, probably in an effort to please shareholders, has distributed dividends to shareholders for much longer, but distributions are still a pittance.

Aaron's also has the lead when it comes to operating efficiency. It just barely beats Rent-A-Center in ROE, but in terms of net profit margins, Aaron's wins by a more significant margin. 

A more traditional renter

While rent-to-own is a cool concept, there are still companies making money renting things out the old fashioned way. One such company is United Rentals (NYSE: URI). United Rentals is the largest equipment rental company in the world.

United Rentals does rent to individuals like you and me. However, the majority of its customers are professional craftsmen. Unlike Aaron's and Rent-A-Center, which rent out things like consumer electronics and furniture, the equipment United Rentals rents out is normally used for more demanding construction and repair jobs.

The company has found itself entangled in scandals in the past, the most notorious of which involved some shady lobbying practices that occurred around a decade ago. That could be water under the bridge by now, but it's still slightly disturbing.

The company also has a working capital deficit, and it seems to solve its debt problems via the issuance of new shares. United Rentals has increased the amount of shares it has outstanding by over 50% since the end of 2009.

Conclusion

Rental companies occupy an interesting niche that hardly ever seems to get any attention. Undoubtedly, there is some good reason behind that. Certain companies in the space, like United Rentals, hardly seem worthy of an investment.

That being said, two companies that offer electronics, furniture, and other things on a rent-to-own basis are currently vying for supremacy. Rent-A-Center has the lead for now, but Aaron's is catching up quick.

If I were to invest in one of the two big rent-to-own companies, it would be Aaron's, no doubt about it. Superior margins, a lower price to tangible book ratio, and much more impressive growth led me to that conclusion. Now, I just hope Aaron's can raise that dividend to a respectable level.  

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

 


Fool blogger Ryan Palmer has no position in any of the stocks mentioned. The Motley Fool does not recommend any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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