Leasing is a profitable business to be in and its importance cannot be highlighted enough in times of market uncertainties. With interest rates set to go up again, companies may find the ‘lease versus own’ analysis leaning in favor of the former. Leasing and rental companies such as Aaron’s, Inc. (NYSE:AAN), McGrath RentCorp (NASDAQ:MGRC), and TAL International Group, Inc. (NYSE:TAL) should be closely watched for important updates:
Aaron’s Demonstrating Strong Revenue Growth
Aaron’s, Inc. (NYSE:AAN) is a specialty retailer of consumer electronics, computers, residential furniture, household appliances and accessories but majority of its revenues come from leasing operations. In the quarter ended March 31, 2013, the company saw leasing operations contributing 78.7 percent to its total revenues of $595 million. Aaron’s has demonstrated strong revenue growth over the last few years. Taking advantage of low interest rates for leasing, the company has successfully boosted its top line from $1.75 billion in 2009 to $2.22 billion in 2012.
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This top line growth trickled very well to profits which jumped from $112.6 million in 2009 to $173 million in 2012. However, the stock has moved in a narrow range of $24.58 – $32.47 during the past 52 weeks and is currently available at $28.2. This translates to a multiple of 14.2 to its trailing 12 month earnings while continued impetus on growth and low cost operations means the metric falls to 11.4 on a forward basis. Sourcing is an important factor to talk about as the company benefits immensely by producing its furniture in house. Furniture accounted for nearly 35 percent of its total revenues last year and as such, this approach has a strong impact on the company’s profitability.
McGrath RentCorp Success in Portable buildings
McGrath RentCorp (NASDAQ:MGRC) has found success in leasing portable buildings to education and commercial markets. In addition, the company operates in electronic test equipment rental besides offering containment solutions for the storage of hazardous and non-hazardous liquids and solids. McGrath RentCorp has successfully scaled operations in recent years while maintaining its double digit profit margins. It has maintained an average of 5.4 percent annual growth in top line over the last 5 years, standing at $361 million in 2012.
This growth rate may not be very high but the company makes up for this through fat margins which stood at 10.4 percent for the three months ended March 31, 2013. McGrath RentCorp also has a share repurchase program under which 2 million shares of common stock are authorized to be bought back. With a debt equity ratio of just 0.75, the business currently quotes at a forward earnings multiple of 16.8.
TAL International Sales Jump
Even better is the case with TAL International Group, Inc. (NYSE:TAL) which is in the business of trading and leasing intermodal containers and chassis. For all practical purposes, container leasing can be considered as its primary business. The company reported a 13 percent jump in sales to $156 million in the latest quarter which included $137 million from leasing operations. Better cost control and limited impact of interest expenses caused a 14 percent jump in net income during the period to $37.5 million.
This growth in top line is expected to continue and even become stronger in coming quarters. Although TAL International Group, Inc. (NYSE:TAL) has a high debt capital structure, it scores well on most other metrics. Included among these are earnings potential (forward price earnings ratio of 8.8) and a great dividend yield in excess of 6 percent.
As seen above, leasing companies look very strong and these stocks may emerge winners in the next leg of market rally. Aaron’s, Inc. (NYSE:AAN) has strong potential as seen from its trading multiples while TAL International Group, Inc. (NYSE:TAL) is a good fit for aggressive investors.