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Rent-A-Center, Zagg and Microsoft highlighted as Zacks Bull and Bear of the Day

Zacks Equity Research

For Immediate Release

Chicago, IL – October 4, 2019 – Zacks Equity Research Rent-A-Center RCII as the Bull of the Day, Zagg ZAGG asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Microsoft MSFT.

Here is a synopsis of all three stocks:

Bull of the Day:

Rent-A-Center is a rent-to-own industry leader based in Plano, Texas that provides consumer electronics, appliances, computers, furniture, and accessories under flexible rental purchase agreements with no long-term obligation.

Solid Q2 Results

Back in August, Rent-A-Center reported earnings of 60 cents a share, which beat the Zacks Consensus Estimate thanks to low operating expenses and reduced interest expenses during the quarter. Total revenue reached $655.9 million, while same-store sales grew 5.8%, marking the 10th straight quarter of comps improvement.

Revenues at RCII’s Core U.S. segment declined around 1% to $451.1 million, but the decrease was offset by the company’s strong comps performance. And thanks to its refranchising efforts (Rent-A-Center is selling off over 80 locations), Franchising revenues surged to $14.9 million.

As a result, management lifted its view for fiscal 2019, and now expects same-store sales growth in the mid-single digits and consolidated revenues to improve.

RCII on the Rise

Shares of Rent-A-Center have soared this year, gaining roughly 56% compared to the S&P 500’s return of roughly 15.3%. Earnings estimates have also been rising, and RCII is now a Zacks Rank #1 (Strong Buy).

For the current fiscal year, seven analysts have revised their earnings estimate upwards in the last 60 days, and the Zacks Consensus Estimate has risen 19 cents from $2.08 to $2.27; earnings could see almost 115% year-over-year growth. 2020 looks pretty strong too, with earnings and revenue expected to continue positive year-over-year growth.

RCII currently trades around 11.4X its forward full-year earnings estimates, a discount compared to the broader Consumer Discretionary market. Investors may see further upside to shares if Rent-A-Center continues to improve its financial position and expand its digital growth initiatives.

Bear of the Day:

Zagg is a company that designs protective clear coverings and accessories for consumer electronic and hand-held devices. Its flagship brand, the invisibleSHIELD, is a protective, high-tech patented film covering, designed for Apple iPhones, laptops, cell phones, digital cameras, PDAs, watch faces, GPS systems, gaming devices and other products.

Q2 Earnings Disappoint

Diluted operating loss of 9 cents per share matched the Zacks Consensus Estimate, while revenues of $106.8 million fell 10% year-over-year. This decrease in total sales was primarily due to a pull forward of product shipments into Q4 2018 to try and offset a potential tariff increase. Gross profit increased to $37.8 million, or 35% of net sales, while operating expenses grew 35% to $44 million.

In the earnings release, CEO Chris Ahern talked about the “pressure [Zagg is] experiencing in [its] core business as the result of a decline in consumer demand for smartphone devices the market has experienced this year.”

Analysts have turned bearish on Zagg, with two cutting estimates in the last 60 days for fiscal 2019. Earnings are expected to decline over 56% for the year, and the Zacks Consensus Estimate has dropped 81 cents during that same time period from $1.44 to $0.63 per share. This sentiment has stretched into 2020. While earnings could see positive growth, our consensus estimate has dropped 51 cents in the past two months.
ZAGG is now a Zacks Rank #5 (Strong Sell).

Shares of the electronics stock have slumped nearly 36% since January compared to the S&P 500’s gain of about 15.3%.

Bottom Line

In order to improve profitability, Zagg is implementing a number of cost savings initiatives like headcount reductions, reducing the amount of operating expense categories, and speeding up “cost synergies” from its recent acquisitions into this year.

But, management did say that it is “exploring strategic alternatives to maximize stockholder value” with the help of BofA Merrill Lynch, so until the company figures out its next moves, it’s probably best to stay away.

Big Surprise at Microsoft's 2019 Surface Event

Microsoft’s productivity-focused Surface hardware hasn’t been taking huge market share, so it isn’t the kind of thing that’s made a lot of headlines. The business has grown, however, and currently generates over $5 billion in revenue. So it does appear that management knows what they’re doing with this group.

In that context, the company’s two new products, to be launched in time for the 2020 holiday season, probably need to be taken seriously. As CEO Satya Nadella says, “The operating system is no longer the most important layer for us.” Instead, “what is most important for us is the app model and the experience. How people are going to write apps for Duo and Neo will have a lot more to do with each other than just writing a Windows app or an Android app, because it’s going to be about the Microsoft graph.”

These two new products supposedly comprise a new product category, not tablets, not laptops, not phones and not foldables. But they’ll have two screens, to facilitate multi-tasking (the company’s experience with the way people use its technology probably shows just how much multi-tasking people normally do).

And while the smaller one (Duo) will run Android, make and receive calls and fit in your pocket, the larger one (Neo), will run on Windows 10X, a dual-screen optimized version of its OS. The screens can fold all the way back to touch each other and you can also magnetically mount a keyboard onto the front or back if you want to use it. Or put it aside to just use one of the screens as a touchscreen.

The whole idea was to give as little detail as possible to the competition about the specs, camera, price, etc, which along with the long time before launch leads me to think that this is Microsoft’s way of sending out feelers to its customer base and developer community. The designs will likely be finalized after some chitchat with the groups involved, so the chances of their failure are minimized.

Microsoft has reason to be concerned about that because of the miserable failure of its attempts at a Windows Phone. So this time, it’s showcasing all the functions of a phone plus more, while calling the 5 by 8 something-inch device a “Surface.” Obviously, people will make the connection and call it a Surface phone. Even if Microsoft keeps harping on the “plus more” part that links it to its Surface lineup.

But Microsoft didn’t just announce things for next year. It also said that there’ll be some laptops and earbuds for this holiday season. So stay tuned.

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