Rent-to-own leader Rent-A-Center (NASDAQ:RCII) will report first-quarter 2007 financial results on Monday, April 30.

What analysts say:

  • Buy, sell, or waffle? Three of the nine analysts covering the Motley Fool Inside Value pick rate the stock a buy, while six have it as a hold.
  • Revenue. Revenue is expected to grow by a hefty 25%, to $756.6 million.
  • Earnings. Profits, on the other hand, are expected to climb 14% to $0.65 per share.

What management says:
Like many of the other industries catering to the unbanked and underbanked community, the rent-to-own industry is facing legal, regulatory, and consumer advocacy assaults. Yet the businesses continue to flourish despite such attacks because of the large, unmet financial needs of their customers. While rental revenues increased 12.5% last quarter and adjusted earnings were flat, Rent-A-Center Chairman and CEO Mark Speese sees additional opportunities to grow the company through acquisitions and by adding financial services to its core rent-to-own focus. Rent-A-Center will be adding payday loans and check-cashing services in upwards of 400 of its 3,400 stores. It closed on its purchase of Rent-Way in December, folding the 782 stores into its operations.

What management does:
Rent-A-Center offers consumer products, electronics, and appliances for rent on a weekly basis, offering the opportunity to purchase the item at the end of the contract. Anytime you rent something, it's going to cost you more than if you bought it outright, but the effective rates of such charges outrage consumer advocates. That's led Rent-A-Center into the courtroom on several occasions, most recently in New Jersey, where the state supreme court upheld the finding that Rent-A-Center's rates ran afoul of the state's usury laws. Although no judgment has yet been entered, the company has reserved $58 million for that eventuality, thus cutting into profits.

Margin

12/05

03/06

06/06

09/06

12/06

Gross

15.2%

15.3%

15.3%

16.0%

16.5%

Operating

11.4%

11.3%

11.5%

12.2%

12.5%

Net

5.8%

5.5%

5.4%

5.9%

4.2%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Whether it's rent-to-own, payday lending, or being a pawnbroker, businesses catering to the subprime market are finding it advantageous to broaden their scope of offerings, if for no other reason than to minimize some of the risk in concentrating their business into just one line. So payday lenders now run pawnshops (and vice versa) as well as buy here/pay here car dealerships. There's online payday lending available, and Rent-a-Center is expanding to make itself a one-stop shopping experience for all of its customers' financial needs.

There will still be "pure play" opportunities in each field. For example, Advance America (NYSE:AEA) is the largest payday lender. Aaron Rents (NYSE:RNT), though smaller than Rent-A-Center by about a third, currently maintains its rent-to-own focus, though it also rents and sells office furnishings for corporate clients.

Largely ignored by traditional financial institutions, the unbanked consumer class continues to offer the rent-to-own industry -- and Rent-A-Center -- an opportunity for future growth.

Related Foolishness:

Rent-A-Center and Advance America are both recommendations of Motley Fool Inside Value. Borrow this 30-day guest pass and get the inside scoop on why the subprime market offers attractive opportunities like these.

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.