Bank of America just raised its price target to $194 for this used car dealer.
America’s Car-Mart, Inc. (CRMT)
From Investors Advisory Service
America’s Car-Mart operates 151 used car dealerships in 12 states. It serves customers with impaired credit or minimal credit histories and finances the loans on its own balance sheet at double-digit interest rates. As it retains the associated credit risk, Car-Mart’s business model is a hybrid between a car dealer and a consumer finance company.
The company has grown by steadily expanding its dealership network, very occasionally through acquisitions, and has lately concentrated more energy on growing dealership level productivity. Car-Mart has been a late adopter of technology, only recently adding basic capabilities like digital payments and enterprise resource planning, which have allowed it to serve more customers per dealership.
The company keeps a very conservative balance sheet. At the end of its most recent quarter, which also completed its Fiscal 2021, it had receivables of $625 million, net of a substantial 23% credit loss reserve. That compares to debt of just $226 million. Excessive leverage could be deadly in an industry where economic downturns and interest rate fluctuations can cause rapid swings in customers’ ability to pay. Car-Mart has been through many difficult periods in the past and maintains a capital structure that keeps it well out of harm’s way.
The current stimulus-rich consumer environment has been a huge boon to Car-Mart. Customers have used their stimulus payments to stay current on their car notes, and Car-Mart has experienced below-average default rates despite the pandemic’s damage to the jobs market and the economy overall.
A shortage of used car inventory has played into the company’s hands as well because customers have accepted price increases while the collateral on Car-Mart’s loan book has depreciated more slowly than credit models would have originally assumed.
Investors seem to realize that growth and profitability are running ahead of their steady-state averages. In the past four quarters, sales increased 23% while EPS more than doubled, yet shares sport a trailing P/E of just 10. Those are the kind of multiples you see at cyclical peaks.
Growth is capital intensive because it takes time for an incremental vehicle to transition from inventory to a loan receivable, to cash receipts on that loan. Nonetheless, the company has consistently generated positive free cash flow, while also growing sales revenue 8% per year over the past ten years.
The main use of incremental borrowing has been to buy back shares. Car-Mart has reduced its diluted share count by an astounding 20% over the past five years. The triumvirate of revenue growth, operating leverage, and a declining share count has caused EPS to increase more than 17% annually during that span, although we note that current profitability is likely exaggerated in this environment.
We model 10% compound EPS growth, which could generate EPS of $24.08 in five years. That figure, combined with a high P/E of 17.4, generates a high price of 419. For a low price, we apply a low P/E of 7.5 to EPS of $10.00, a round number that looks like a reasonably conservative decrement to current blowout earnings. This yields a low price of 75. On that basis, the upside/downside ratio is 3.8 to 1.
Doug Gerlach, InvestorAdvisoryService.com, 1-877-33-ICLUB, July 2021