America’s Car-Mart, Inc: Not For Queasy Investors

When the economy is even halfway decent, it’s a good time to be a car salesman in America. At America’s Car-Mart, Inc. (CRMT), there’s no way to express the Q2 earnings report for other than “robust”!


The benefit of being a relatively small player — CRMT owns 136 dealerships in just 10 states — is that it is easier to steer the ship and respond to market changes. The reason is that America’s Car-Mart operates as a decentralized entity, operating in small cities where each dealer is responsible for buying and selling their own inventory.

The other benefit that CRMT has is that it deals exclusively in used autos for the non-prime credit consumer, also known as “buy here pay here.” That means it can offer used vehicles at interest rates with a weighted average of 14.7%.

In Q2, America’s Car-Mart reported net income of $7.5 million, or 83 cents per diluted share vs. 61 cents per diluted share for prior year quarter. This came on revenues of $134 million, a 10% increase from last year’s $121 million. That all-important metric of same store revenue growth came in at a very encouraging 5.4%.

Used car sales are doing well in this fractured economy, where millions of people have left the workforce and are presumably credit-challenged. That may also be the explanation for the unit sales increase of 13.9% to 12,084. There was a 2.3% decline in average sales price to $9,490.

The challenge with non-prime consumers, regardless of sector, is collections and charge-offs. If you’ve followed the bad debt debacle at Conn’s Inc. (CONN), then you know how careful you must be with underwriting. CRMT’s net charge-offs as a percent of average finance receivables was 7%, up from 6.9%. That’s about in line with previous years.

The provision for credit losses of 26.3% of sales was flat with last year. That’s also consistent, and acceptable in the current climate.

The 36% year-over-year increase in earnings per share (EPS) for the quarter brings the first half of CRMT’s fiscal year to $1.62, up 15.5%.

CRMT is having a good year so far, with projected FY15 earnings of $3 per share this year (up 34%) and $3.39 next year (up 13%). Analysts have an oddly low 5-year projected EPS growth rate of 8.25%. With the stock trading at $49.75, CRMT trades at 16.5x FY15 estimates. That’s not at all unreasonable on expected EPS growth for the next two years.

America’s Car-Mart has a very specific method of allocating capital. It first uses it to grow and support the business and then uses the rest to buy back shares. It has reduced share count by 30% since 2010.

CRMT is not for queasy investors. The stock tends to either roar upwards or plummet based on earnings. In Q1, for example, CRMT missed estimates by 10 cents and the stock fell 17%. As of this writing, earnings have driven the stock up 13%.

If traditional new and used auto dealers are more your stride, have a look at AutoNation, Inc. (AN) and CarMax, Inc. (KMX). The former is fairly valued at 17x FY14 estimates with a 16% long term growth rate. The latter sells at 20x estimates on 14% growth.

As of this writing, Lawrence Meyers does not hold a position in any of the aforementioned securities.

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