America’s Car-Mart earnings and revenue look to rise in the second quarter of fiscal 2020, analysts said.
Earnings per share are expected to increase by 14.6% to $1.81 per share, and revenue is projected to rise by 1.4% to $169.59 million, based on a consensus of five analysts. The Bentonville-based buy here, pay here used car dealer will report earnings for the period ending Oct. 31 after the markets close Nov. 18.
In an earnings preview for the auto finance industry, equity analysts John Hecht, Kyle Joseph, and Trevor Williams, and equity associate Ryan Carr, all of Jefferies LLC, said factors impacting the industry have been stable with regard to underwriting, credit trends and origination factors. This should lead to a positive earnings period for the industry, but seasonal factors have shifted from the previous quarter. Talk regarding rates has improved while liability sensitivity has been modest.
Operating conditions in the third quarter were “balanced and constructive — stable volumes, credit and residual value trends,” Hecht, Joseph, Williams sand Carr said. “First, used car sales volumes increased over the course of the quarter due to a strong economic backdrop and also as the wide relative value between new and used cars has spurred a greater composition of used car buying. Higher used car sales volumes should signal a strong period of positive loan volumes as well. Second, residual value patterns were supportive as Manheim and J.D. Power continue to inch higher, while we continue to observe stable credit quality.”
Between January and September, average used vehicle prices were 1.7% higher than they were in the same period in 2018, according to J.D. Power. The prices have been supported by a large number of late-model used vehicles coming into the market and increased dealer demand. The prices of the vehicles are comparable to new models.
In October, wholesale used vehicle prices rose 0.29%, from September, according to Manheim. The Manheim Used Vehicle Value Index fell 0.4% to 140.3 in October, from the same month in 2018. It was the first year-over-year decline in the index in 33 months. In October 2018, prices rose to a record because of strong consumer demand related to tariffs concerns and rising interest rates, and used car dealers were willing to spend a record amount to build vehicle inventory to meet the demand.
Competition in the auto finance industry has been balanced, with positive conditions in the subprime category and competition rising in the category with high credit scores, according to Hecht, Joseph, Williams sand Carr. Trends related to origination and underwriting and lenders have been cautious, indicating a balanced competitive market. Over the past six quarters, this has tightened. And recently, some banks have started to put capital in super-prime auto financing, leading to a rise in competition in this category. The competition is balanced in the prime and subprime categories. Car-Mart primarily operates in the subprime category.
Credit trends have been good, but credit benefits aren’t expected to be as strong as they were in the second half of 2018, Hecht, Joseph, Williams sand Carr said. Net charge offs and delinquencies have been as expected and have been tightening since late 2016. This has been reflected in credit trends and should continue through the third quarter. Recovery rates have likely leveled off after they improved in the second half of 2018 and provide a slight benefit.
In the first half of 2019, the annual rate of used vehicle sales rose by nearly 200,000 vehicles to 39.5 million, from the same period in 2018. But the sales rate for new vehicles has fallen for three consecutive months, and Hecht, Joseph, Williams sand Carr explained that new vehicle sales and tightening in auto lending should be considered with regard to industry originations. In October, used vehicle sales rose 1.4%, from the same month in 2018, and the annual rate of used vehicle sales increased to 39.6 million, according to Cox Automotive. Meanwhile, new vehicle sales fell 1.8% in October, from the same month in 2018, leading the annual rate of sales to 16.5 million vehicles.
The percentage of new vehicles with financing has been flat over the past year at 86% after rising for several years, according to Hecht, Joseph, Williams and Carr. Lease trends are following a similar pattern and comprise 30% of all new vehicle transactions, down from the previous year. Used vehicles with financing rose to 56% from a year ago.
Loan terms continue to lengthen for new vehicles and some used vehicles but have declined in some loan categories, said Hecht, Joseph, Williams sand Carr, adding they expect the tightening to continue to return to the previous eight quarter average. Also, the average credit scores for new and used loans have been rising. This is expected to be positive for the industry with improved credit quality, following tighter underwriting standards. An industry risk has been the rising term lengths of average loans for the below prime categories, but it has declined slightly. Rising term rates are tied to the increasing length of how long a vehicle lasts and allow for lower monthly payments. New vehicle term lengths rose 0.4 months in the second quarter of 2019, from the same period in 2018. Used vehicle terms rose similarly; however, in the deep subprime category, terms rose 1.35 months.
Interest rates rose in most categories, except for new loans in the deep subprime category. Rates for used loans rose 59 basis points in the deep subprime category.
With regard to Car-Mart, second-quarter gross margin on sales is expected to rise 21 basis points to 41.9%, from the same period in the previous fiscal year, according to Hecht, Joseph, Williams sand Carr. Vehicle sales are projected to increase by 0.5% to 12,667 vehicles, and the average sales price is expected to increase by 3.5% to $11,401.
“We remain impressed by the consistent growth and results within (Car-Mart,” said Hecht, Joseph, Williams sand 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 that will be less likely to charge off has paid off as the company has consistently delivered strong top-line results. While (same-store sales) have shown some reverberation as of late, we highlight that this is following a continued period of exceptionally strong performance. We remain positive on (Car-Mart’s) ability to deliver strong and consistent results.”
The analysts gave Car-Mart a hold rating and a 12-month price of $96. Shares of Car-Mart (NASDAQ: CRMT) closed Wednesday (Nov. 6) at $94.64, down 10 cents or 0.11%. In the past 52 weeks, the stock has ranged between $104.05 and $66.26.