America’s Car-Mart is expected to report earnings per share to rise 27.3% to $1.82 per share in the fourth quarter of fiscal 2019, from $1.43 per share in the same period in 2018, based on a consensus of five analysts. Revenue is projected to increase by 10.4% to $187.04 million.
The Bentonville-based buy here, pay here used car dealer will report after the markets close Tuesday (May 21) financial results for the fourth quarter and fiscal 2019, which ended April 30. For fiscal 2019, Car-Mart is expected to report earnings per share to increase 32.3% to $6.48, from $4.90 in the previous fiscal year. Revenue for the fiscal year is expected to rise by 10.6% to $676.81 million.
Credit trends have become stable for the auto finance industry, and the tax refund season has led to a normal seasonal recovery in credit but might impact sales volumes, analysts said.
In a recent earnings preview for the companies, including Car-Mart, equity analysts John Hecht, Kyle Joseph, Michael Del Grosso, and equity associates Trevor Williams and Ryan Carr, all of Jefferies LLC, said refund activity became normal by early March and led to the typical recovery in loss rates and an increase in loan demand as used car sales continue to rise. Net-charge off rates typically improve between 5% and 10% in the first quarter, from the previous period and improve 30% in the second quarter, from the previous period. Hecht, Joseph, Del Grosso, Williams and Carr expect this to take place in the coming months as used car sales continue to rise and should support loan volumes, while the seasonally adjusted rate of sales declines. However, concerns over the pace and volume of tax returns in the first quarter might have pushed some volume into the second quarter.
An ongoing risk to the industry has been the rise in the length of loan terms, but the pace of change has been slowing, according to Hecht, Joseph, Del Grosso, Williams and Carr. The increase in term lengths are partially a result of cars lasting longer and lead to a reduced monthly payment. In the fourth quarter of fiscal 2018, which ended in April 2017, the average contract term for Car-Mart was at 32.5 months. In the third quarter of fiscal 2019, the average contract term declined to 32 months, from 32.4 months in the same period in fiscal 2018.
At the end of the third quarter of fiscal 2019, which ended Jan. 31, the number of active loans increased 1.4%, or by 1,000 loans, to 75,000 loans. The company had 143 dealerships at the end of the period.
Hecht, Joseph, Del Grosso, Williams and Carr see little room for credit to continue to improve and expect trends to remain stable, with the exception for changes in the broader economy. Car-Mart accounts over 30 days past due fell 90 basis points to 3.2% in the third quarter of fiscal 2019, from the same period in 2018. The company’s net charge-offs fell 120 basis points to 6.2%, over the same period. After the company repossesses a vehicle, it is sold on the wholesale market, and the difference between the loan amount and the wholesale price represents the net charge-off.
Industry recovery rates are likely to level off after improving over the second half of 2018, according to Hecht, Joseph, Del Grosso, Williams and Carr. The Manheim Used Vehicle Value Index, which tracks wholesale used vehicle prices, has been seen as an indicator for recovery rates for auto lenders, and the index rose 4.5% to 138.4 in April, from the same month in 2018. The index also rose 4% in March. Hecht, Joseph, Del Grosso, Williams and Carr expect Car-Mart’s losses as a percentage of gross finance receivables to be about 27.58%, down from 30.21% in the same period in 2018.
“We remain impressed by the results at (Car-Mart), with (third-quarter fiscal 2019) marking the fifth consecutive quarter of earnings beats versus our estimates,” said Hecht, Joseph, Del Grosso, Williams and Carr. “We note continued stability in credit and strong top-line trends, which lend us greater confidence that (Car-Mart) stands to benefit as the operating environment improves. Management’s strategy of ‘blocking and tackling’ by investing in long-term employees, building community-based stores and selling reliable vehicles which will be less likely to charge off has paid off as the company has consistently delivered strong top-line results.”
Jefferies has a hold rating on the company’s stock and a 12-month target price of $96.
Shares of Car-Mart (NASDAQ: CRMT) closed Wednesday (May 15) at $95.97, up $1.03, or 1.08%. In the past 52 weeks, the stock has ranged between $104.05 and $53.60.