Why Rent-A-Center Inc.'s Shares Cratered

By Markets Fool.com

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

Continue Reading Below

What: Shares of Rent-A-Center Inc. are down some 14% today after briefly plunging by more than 17% in early trading. The rent-to-own operator's fourth-quarter earnings report,released after Monday's closing bell, showed Rent-A-Center missed both its top- and bottom-line targets.

So what: Rent-A-Center's fourth-quarter revenue of $797 million resulted in generally accepted accounting principles earnings of $0.48 per share and adjusted EPS of $0.50. While the company's adjusted EPS doubled from the year-ago quarter, Wall Street analysts had pegged Rent-A-Center to more optimistic targets -- the consensus for revenue had been $804.8 million, and Rent-A-Center's EPS was expected to come in at $0.63.

Rent-A-Center expects to earn between $2.05 and $2.30 in adjusted EPS for 2015 on full-year revenue projected to range from $3.25 billion to $3.35 billion. Both figures, particularly on the bottom line, fall short of what Wall Street wanted -- analysts expected Rent-A-Center to generate $3.34 billion in revenue and $2.48 in adjusted EPS.

Now what: Investors might have been more bullish on Rent-A-Center's results if the company's shares had not risen by nearly 50% over the past year before today's collapse, with its P/E rising to post-crisis highs. The company's EPS expectation for 2015 offers anywhere from 5% to 18% upside from 2014's adjusted full-year EPS of $1.95. Rent-A-Center expects its top line to grow primarily due to new store openings -- its core same-store sales are expected to range from a decline of 1% to a gain of 1%, averaging out to no growth at all.

Rent-A-Center's P/E is still very close to 20 after today's crash, a level it has only touched twice since the start of this century. The first time that happened, Rent-A-Center grew its way out of high valuations, but the second time it suffered through a financial collapse with the rest of the economy. Since Rent-A-Center doesn't expect to post the same growth rates that drove its P/E down in the early aughts (its EPS nearly tripled from the end of 2001 to the end of 2002), it might be best for shareholders to wait for a slide back to lower valuations before capitalizing on today's disappointment.

Continue Reading Below

The article Why Rent-A-Center Inc.'s Shares Cratered originally appeared on Fool.com.

Alex Planes has no position in any stocks mentioned. The Motley Fool has no position in 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.