Car-Mart outperforms other companies in recession, analysts say

Bentonville-based America’s Car-Mart is one of several lenders that have performed better than other companies in economic downturns, analysts said.

The buy here, pay here used car dealer was recently included in a report on consumer finance showing that the lenders who serve those with lower credit scores outperformed other companies in a recession. The report by equity analysts John Hecht, Kyle Joseph and Trevor Williams and equity associate Ryan Carr, all of Jefferies, also noted Aaron’s, Credit Acceptance, EZCORP Inc., FirstCash and Rent-A-Center as companies that outperformed during a downturn.

“We believe some of these stocks represent current attractive investments given valuation and growth opportunities and also merit attention in the event of macro-economic deterioration,” according to Hecht, Joseph, Williams and Carr. “The stocks can be owned now as they trade at favorable valuations and as consumer credit conditions are good, yet they also stand to do relatively well if the economic backdrop worsens.

“We remain favorable on the peer group given a multitude of near-term growth prospects and stable credit performance, which we believe serve as catalysts for the stocks.”

These companies have business models that are resilient during a downturn, and they perform “relatively well,” Hecht, Joseph, Williams and Carr said. Lenders that serve customers with lower credit scores have outperformed banks and credit card companies. Between 2007 and 2009, the stock price of this group of lenders initially declined 35%, while the S&P 500 fell 50%, credit cards dropped 76% and banks were down 29%. However, the non-prime lenders recovered quickly, with stock prices up 50% within one year of 2009 and 225% in five years.

Non-prime lenders have an opportunity to benefit when traditional lenders tighten underwriting standards and personal credit scores fall. Borrowers look to other lenders in times of economic distress as traditional means of financing become limited. This also allows companies to reach customers with higher credit scores and increase loan volumes.

“We note the typical non-prime customer would use non-prime financing whether or not a recession is occurring, and these customers are more resilient from a recovery perspective, or alternatively, less negatively impacted by overall market conditions,” Hecht, Joseph, Williams and Carr said. “We observe these trends through strong revenue growth during the recession in the non-prime space.”

The analysts also noted that while the U.S. banks outperformed the non-prime lenders initially, they recovered more quickly as the banks continued to decline. One exception, however, was Car-Mart, with the stock rising 18% between 2007 and 2009.

In a recent earnings call, CEO Jeff Williams explained the company’s performance during the past recession: “The company’s credit results were actually at all-time lows at the tail end of the last recession. So by putting a good product out there for a fair price and supporting these customers, if credit was to constrict in the market significantly, that would certainly be a positive for us. And as somebody that’s providing good basic affordable transportation with the service to support these customers and things that happen in their lives, the last recession was actually very good for Car-Mart.”

Recently, traditional lenders have begun to no longer lend to those with lower credit scores, particularly the subprime customer, according to the analysts. Auto lenders started to tighten lending standards in mid-2016 and credit card lenders started soon afterward.

Hecht, Joseph, Williams and Carr have a hold rating on Car-Mart’s stock and a 12-month target price of $96. They noted that the company has “solid credit metrics, growing dealer base and consistent returns over the long term. We are encouraged by the strong credit performance coupled with stable top-line trends, during six consecutive large EPS beats in recent quarters. Credit has continued to post consistently positive results versus our estimates, and we highlight the company’s strategy of providing a reliable vehicle and building community relationships (aka ‘blocking and tackling’ in management’s words), has exhibited itself in the form of this pristine credit performance.”

In fiscal 2019, which ended April 30, Car-Mart increased its loan portfolio by $42 million, repurchased $27 million of shares, increased inventory by $4 million and invested $4 million into long-term capital while its debt rose $600,000. The company had “strong cash flows provided by what we consider a best-in-industry business model,” according to Hecht, Joseph, Williams and Carr.

Since Dec. 11, shares of Car-Mart (NASDAQ: CRMT) have risen 36.6% from $67.15 to close Wednesday (Sept. 18) at $91.74.