Car-Mart shares push higher amid lower fuel prices

Investors of America’s Car-Mart have enjoyed a robust comeback in the recent quarter after a somewhat sluggish first half amid higher charge-offs and competitive pressures among the company’s larger lots.

Since the start of the company’s fiscal second quarter (Aug. 1) through Wednesday (Nov. 12) shares are up 28.4%, or $10.68, as of Wednesday’s closing price at $48.20. The share price set a new 52-week high on Monday (Nov. 10) trading at $48.93 intraday, before closing at $48.70. 

Company executives have said repeatedly they have strong cash flow, low debt levels and a growing book of subprime business with 60,000 customers. But, investors began to shy away from the stock earlier this year after the company reported weaker same-store sales, flat earnings with a sluggish overall loan portfolio performance. 

In the recent quarter, Car-Mart delivered big on net earnings which drew more interest from Wall Street as the competitive pressures felt for the previous year began to ease. 

Jeff Williams, chief financial officer of America’s Car-Mart, recently told analysts at the C.L. King investor conference in New York that  the past six years of 0% interest had drawn more lenders into the subprime auto market to chase higher yields. Many of those are new car lenders and their used-car departments, independent auto dealers and traditional tote-the-note lots that write the loans and then sell them off in the secondary market, he said.

Experian considers subprime as borrowers with credit scores of 550 and 619, and deep subprime levels involve credit scores below 550. Williams said Car-Mart’s core customer falls in the deep subprime level.

Car-Mart’s delinquencies have improved over the past two quarters. Now that lower fuel prices are giving consumers some breathing room, analysts expect this will also be a positive for the car dealer and finance company’s ability to collect on loans.

Analysts with Stifel Nicolas estimate that households earning $30,000 a year spend up to one-fifth of their disposable income on gasoline. With fuel prices well below $3 per gallon, investment bank Cowen predicts savings to consumers to tally some $40 billion over the next year if fuel prices stay under $3.10 a gallon. 

Bill Armstrong, and analyst with C.L. King, recently upgraded Car-Mart shares from neutral to a buy position.

“We think credit availability for subprime auto buyers may begin tightening up in the months ahead as industry-wide loss rates continue to increase. At the same time, Car-Mart appears to be more effectively adapting to the still-difficult competitive environment, as evidenced by its improved performance in the first quarter,” Armstrong said.

The Street.com also rates America’s Car-Mart a “buy” position citing a number of strengths outweighing the competitive pressures.

“The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, attractive valuation levels, good cash flow from operations and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income,” Street.com notes on its website.

Car-Mart is expected to report its second fiscal quarter earnings on Nov. 19. Wall Street consensus is 66 cents per share on revenue of $120.56 million. This would be a gain of 8.1% in net profits while top line revenue is expected to dip 0.7% from a year ago.