Conn's Upside May Be Limited Near Term After Year-Long Run

Stifel downgraded shares of Conn's Inc CONN, premised on its view that the stock has run up too much in the year-to-date period and that near-term upside to the shares is somewhat limited.

The firm noted that the stock is up 117 percent year to date.

As such, the firm downgraded Conn's shares from Buy to Hold but raised the price target from $26 to $30.

At time of writing, shares of Conn's were declining 5.81 percent to $26.33.

Analysts John Baugh, Dillard Watt and Paul Betz, however, said they have not changed their view that Conn's can be a much higher stock over the next 24–36 months. That said, the analysts see a more difficult path to significant share price appreciation near term, as Hurricane Harvey impacts near-term sales and immigration talk hurting its important Hispanic demographic.

The firm said it has adjusted its third quarter estimates to account for the impact from Hurricane Harvey, which it feels will impact October sales as well as result in a material increase in the provision rate for credit losses. The firm estimates that about 30 percent of Conn's total business is in the Hurricane Harvey impacted areas.

"Management will clearly be breaking out the credit performance without the Harvey impact but the 'optics' of the changes is clearly another hurdle the longs will have to clear given the sensitivity to credit performance," the firm added.

Meanwhile, the firm said it has no liquidity concerns and believes that credit operations are being run more efficiently with lower risk. The firm noted that the company has been able to nearly sustain its retail profit margins despite revenue per store declining 25 percent.

The firm sees further sequential improvements in Conn's comps in the ensuing quarters, although it believes the third quarter will be less robust due to the storm.

Longer term, the firm believes there is meaningful earnings power, as loss rates come down and credit yield continues to improve.

Stifel upwardly revised its 2018 and 2019 estimates. Based on the revision, the firm raised its price target from $26 to $30, as it believes Conn's is worth a 10-times $3 in earnings per share, a number the company is essentially earning today on a run-rate basis, if the loan book for the higher APR is fully seasoned and the one-time impacts to provision from the recent hurricane are excluded.