- Summary: Ratefinancials (a research firm which only uses securities filings for its research) is worried that Circuit City (NYSE:CC) relies too much on extended warranty revenue for profitability. Additionally, they are concerned about the the way the company handles certain accounting issues. For example, about $3 billion of operating leases are not listed on the balance sheet as long term obligations. They estimate Circuit City's "normalized" earnings at $0.36/share, significantly lower than the $0.79/share reported by the company. Ratefinancials stands alone - the other 28 firms that cover the stock expect it to outperform other stocks in the sector, and have a price target of $30.50 (it closed yesterday at $22.70).
Comment on related stocks/ETFs: On the one hand, Circuit City appears to have turned things around and its stock has outperformed rival Best Buy over the past year. However, having all its eggs in the extended warranty basket is of definite concern. Note that Circuit City is not the only warranty income using it to juice up their bottom line (click chart to enlarge):