Rent-to-Own for Big Returns

06/20/2013 9:00 am EST


This company is seeing record revenues as its core businesses expand, writes John Deman of the Investment Reporter.

Easyhome (Toronto: EH), usually written without the capital as "easyhome," is a buy for long-term gains and dividends that yield 3.3% and rise from time to time.

Easyhome is Canada's largest merchandise leasing company. From 191 stores, it offers brand-name appliances, household furnishings, and home electronics to consumers under weekly or monthly lease-to-own agreements. From 100 locations, easyfinancial offers a variety of financial services.

In the first three months of 2013, easyhome earned $2.9 million, or 24 cents a share. This was up 9.1% from $2.6 million a year earlier. Revenue grew more than costs, climbing by 5.2% to a record $52.4 million. Lower lease revenue of $38.9 million was more than offset by higher interest income of $7.9 million and higher other revenue of $5.6 million.

The leasing business' same-store sales grew by 5.9%. Same-store deliveries were up by 10.2%. Including easyfinancial, same-store revenue growth jumped by 12% from a year earlier.

The consumer loans receivable portfolio rose by 53.1% to $74.7 million. In the first quarter, revenue climbed by 44.4% from a year earlier. Easyhome's first quarter profit jumped by over 27% to 28 cents a share.

For all of 2013, easyhome is expected to earn $1.21 a share. This is up substantially from earnings of 84 cents a share in 2012. The company's earnings are expected to climb further to $1.45 a share in 2014.

Given this earnings per share growth, the shares appear undervalued. Based on this year's earnings estimate, easyhome trades at an appealingly low forward price-to-earnings ratio of eight. Based on next year's estimate, the P/E ratio is even better.

Over five years, its earnings have risen from 84 cents a share in 2008 to an expected $1.21 a share in 2013. That works out to an average yearly compound growth rate of 7.6%.

Subtract cash of $6.327 million from total debt of $52.553 million and its net debt is $46.226 million. Divide this by the cash flow and easyhome's net-debt-to-cash-flow ratio is only 0.65 times. That's well within our usual comfort zone of two times or less. Further reducing the company's financial risk are its recurring and dependable weekly and monthly revenue.

Yet another positive aspect of easyhome is that its cash flow greatly exceeds its needs. The $70.746 million easily covers total capital investment of $12.428 million and dividend payments of $1.015 million. This should keep the company's balance sheet healthy and give it financial flexibility. As a result, easyhome can easily raise its dividends and keep growing.

Easyhome continues to expand. In the first quarter, it integrated 15 stores that it acquired from a large US-based rent-to-own company. The company plans to open 25 or more new stores this year. Easyfinancial's longer-term goal is to become Canada's top provider of consumer loans as an alternative to the banks and payday lenders.

Growing revenue and operating income should raise the company's share price. It will also give easyhome the means to raise your dividends.

Once you have bought the shares, a good way to increase your holdings is to register in easyhome's DRIP (or Dividend Reinvestment Plan). It will reinvest your dividends without any transaction costs.

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