America’s Car-Mart earnings and revenue are expected to increase in the third quarter of fiscal 2020 as its stock price jumped to a record high for two consecutive days.
After the markets close Wednesday (Feb. 19), the Bentonville-based buy here, pay here used car dealer is expected to report earnings per share for the quarter that ended Jan. 31 increased 14.2%, or by 22 cents, to $1.77 per share, from $1.55 per share in the same period spanning 2018 and 2019, based on a consensus of four analysts. Revenue is expected to rise 6.5% to $171.47 million, from $161.05 million.
Meanwhile, shares of Car-Mart (NASDAQ: CRMT) closed at a record of $120.52 on Feb. 12 after rising as high as $120.73 for the day. The stock has risen 53.9%, from when it closed at $78.31 on Feb. 12, 2019. The stock price first exceeded $100 on Sept. 12, 2018, when it spiked to $100.75, before closing at $83 for the day. The stock first closed above $100 on April 26, 2019, when it ended the day at $101.89. The stock has consistently closed above $100 since Nov. 22, 2019, when it closed at $101.31. On Thursday (Feb. 13), the stock jumped to another high of $121.88, and as of Thursday afternoon, it was trading at $121.09, up 57 cents, or 0.47%.
In an earnings preview on the automotive finance industry, equity analysts John Hecht, Kyle Joseph, Trevor Williams, and equity associates Ryan Carr and Lance Jessurun, all of Jefferies, gave a hold rating on Car-Mart stock and a 12-month target price of $108.
The consumer finance industry is expected to be stable, to see earnings rise as a result of scale and loan growth and to have relative values, according to Hecht, Joseph, Williams, Carr and Jessurun. Seasonal factors that impact the industry in the last quarter of the year include lower than average loan volumes, higher net charge offs and lower recovery rates. These factors should be expected because they typically impact the same period each year, and reactions to reports on the period have been more down historically.
Over the period, operating conditions were balanced on credit and margins while used car volumes and values fell slightly, said Hecht, Joseph, Williams, Carr and Jessurun. In previous quarters, car sales had risen consistently. Vehicle values fell from a seasonal high. Without increases in market share, loan volumes and recovery rates could impact earnings. These headwinds should be offset by stable pricing as funding costs decline. Credit has remained strong, and net charge offs have fallen from the same period last year as a result of tightening in the industry.
Competition remains balanced with lenders being cautious, according to Hecht, Joseph, Williams, Carr and Jessurun. Sub-prime conditions are positive, while competition starts to return in the super-prime segment, with some banks deploying capital into super-prime auto financing.
Used car volumes rose throughout 2019 but slowed leading into the last quarter of the year, according to Hecht, Joseph, Williams, Carr and Jessurun.
In January, total used vehicle sales rose 2.8%, from the same month in 2019, according to Cox Automotive. The seasonally adjusted annual rate of sales increased to 39.5 million in January, from 38.8 million in the same month in 2019. The January sales rate is down from 40 million in December. The used retail sales rate is 20.7 million for January, up from 19.8 million in the same month in 2019. The January sales rate for used retail is also up from 20.1 million in December.
Wholesale used vehicle prices on a mix-, mileage-, and seasonally adjusted basis rose 0.39% in January, from December, according to the Manheim Used Vehicle Value Index. The index rose 4.6% to a record of 141.6 in January, from the same month in 2019. Combined, the value of three-year-old vehicles fell 0.2% in January. Non-luxury vehicle prices were flat, while luxury vehicles fell 0.7%.
Hecht, Joseph, Williams, Carr and Jessurun noted a risk to the automotive finance industry has been the rising term lengths below the prime segments, but the risk has moderated slightly as term lengths for new vehicles have continued to rise. Term length increases can be attributed to the rise in how long a vehicle lasts along with a buyer’s credit score. Buyers with a lower credit score tend to receive shorter terms. Used vehicle terms rose 0.5 months, while new vehicle terms increased 0.8 months. In the deep subprime segment of the used vehicle market, terms increased 1.2 months.
Average interest rates have risen for new and used car loans, according to Hecht, Joseph, Williams, Carr and Jessurun. Rates for used loans increased 54 basis points and 23 basis points for new. Credit trends are expected to remain stable with little room for improvement, the analysts’ report shows. Losses have declined from the previous quarter and the previous year. Total delinquencies fell 31 basis points from the previous year.
Hecht, Joseph, Williams, Carr and Jessurun expect Car-Mart credit metrics to continue to be favorable for the company and have benefited earnings. In the third quarter, gross margin on auto sales is expected to fall 96 basis points to 40.6%. The analysts expect the company’s vehicle sales to rise 7% to about 12,800 vehicles in the third quarter of fiscal 2020. The average retail sales price is projected to increase 5% to $11,700.
“We highlight robust growth trends within (Car-Mart) and remain impressed by the consistent growth and positive results,” Hecht, Joseph, Williams, Carr and Jessurun said. “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 continues to improve. 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. We remain positive on (Car-Mart’s) ability to deliver strong and consistent results.”