Rent-Way's Black Ink May Lure A Buyer

Onward And Upward
Renting out merchandise such as furniture, PCs, and TVs can be highly profitable. After three years of losses -- due in part to earnings restatements -- Rent-Way (RWY ), an operator of 780 rental shops, started making money last year. And results so far this year -- with a jump in operating margins -- have cheered investors.

One California money manager (who didn't want to be identified and has been buying shares) says that with sales, earnings, and margins higher, Rent-Way may now be a target of bigger rival Aaron Rents (RNT ). Trading at 8, Rent-Way is worth 13 in a buyout, he says. Aaron's $1.1 billion market cap dwarfs Rent-Way's $230 million value. John Baugh of Legg Mason (LM ) agrees that Aaron may "take a look" at Rent-Way but doubts Aaron will do a deal. Michael Gallo of CL King & Associates, which has done banking for Rent-Way, has upgraded Rent-Way from "accumulate" to "strong buy" -- just on fundamentals. He notes that operating margins, which came in at 10.5%, can go higher still.

He forecasts: earnings of 59 cents a share in 2005 on sales of $522.6 million, and 74 cents in 2006 on $552 million vs. 2004's 32 cents on $441.5 million. Rent-Way and Aaron didn't return calls.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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