Shareholders of America's Car-Mart would probably like to forget the past six months even happened. The stock dropped 55.6% and now trades at $20. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in America's Car-Mart, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think America's Car-Mart Will Underperform?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons we avoid CRMT and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.
America's Car-Mart’s demand has been shrinking over the last two years as its same-store sales have averaged 4.6% annual declines.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for America's Car-Mart, its EPS declined by 74.7% annually over the last three years while its revenue grew by 1.6%. This tells us the company became less profitable on a per-share basis as it expanded.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
America's Car-Mart’s $1.54 billion of debt exceeds the $251 million of cash on its balance sheet. Furthermore, its 21× net-debt-to-EBITDA ratio (based on its EBITDA of $60.65 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. America's Car-Mart could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope America's Car-Mart can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
America's Car-Mart falls short of our quality standards. Following the recent decline, the stock trades at 60.5× forward P/E (or $20 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at a top digital advertising platform riding the creator economy.
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