Analysts peg Car-Mart profit to rise 14% in second quarter of fiscal 2021

by Jeff Della Rosa ([email protected]) 230 views 

Rogers-based America’s Car-Mart Inc. is expected to post an earnings increase in the second quarter of fiscal 2021 as used vehicle prices rise. Meanwhile, the buy here, pay here used car dealer has updated its lender agreement.

After the markets close Monday (Nov. 16), Car-Mart is expected to report earnings for the period ending Oct. 31 rose by 14.5% to $2.29 per share, from $2 per share in the same period last year, according to a consensus of three analysts. Revenue is expected to increase by 8.2% to $205.99 million, from $190.31 million.

In an earnings preview on the consumer finance industry, equity analysts John Hecht and Kyle Joseph and equity associates Ryan Carr and Lance Jessurun, all of Jefferies LLC, said operating conditions look to be “resilient” and are strong compared to other sub-sectors, and this includes positive net interest margin, credit volume and residual values.

“While we believe visibility in (2021) is weak, we believe attractive relative valuations and a positive narrative will be constructive for the near term,” the analysts noted. “Investors may need to be more ‘nimble’ over the course of the next few quarters as trends may change rapidly when the impacts of stimulus wear off.”

Credit trends improved as vehicle delinquencies and net charge offs have fallen. In May, net charge offs were the lowest rate in more than 10 years. Net charge offs declined 2.7 percentage points to 0.77% through August, from the same period in 2019. Over the same period, delinquencies fell 3.6 percentage points to 4.73%. Improved credit trends could contribute to lower than expected net charge offs and better than expected operating results, but the analysts were uncertain how much of this projected improvement could be attributed to stimulus, deferrals and higher savings rates. Yet, the improvement should boost quarterly earnings.

Auto loans in deferral have declined from the May and June peak in which nearly 25% of borrowers were in deferral. Nearly 90% of those deferrals have expired. As a result, about 3% to 4% of the loans were in deferral, many of which will likely soon expire. Auto loan volumes have rebounded in a V-shaped recovery since May and June, and the volumes are up year-over-year, with used vehicles experiencing the greatest increase, according to the analysts. Third-quarter used sales could rise by 26%, from the second quarter.

Compared to banks, auto lenders are expected to have positive net margins while rates are near zero. Yields from used vehicle contracts have been consistent as rates have fallen, and new car contract pricing has decreased with the rates while the cost of funds has declined, the analysts said.

Hecht, Joseph, Carr and Jessurun compared the existing economy to the Great Recession, in which unemployment reached a peak of 10% while underemployment rates were in the mid-to-high teens. Credit trends worsened in the period, with defaults rising from 3.5% to about 10%. If unemployment were to rise to similar levels in the existing economy, peak net charge offs are expected. Also, higher levels of unemployment are expected to have a linear relationship with peak losses and vice versa, the analysts said.

Used car volumes are rising and exceeding volumes at the same point in 2019. The annual rate of used car sales was more than 40 million vehicles, and recently, the seasonally adjusted annual rate reached 16 million. Loan volumes were down between 25% and 50% earlier in the year, but have recovered and are up 10%-20% year-over-year.

“Slowing new car sales and some tightening in the auto lending market are both factors to consider in assessing industry originations,” the analysts said. “Similarly, we observe that the percentage of vehicles with financing has flattened over the past year after increasing for several years, and lease trends also reflect a similar stabilization, after rising for several years as the economy expanded. That said, more recently disruptions tied to (COVID-19)/quarantine have disrupted trends.”

Vehicles with financing have remained flat in the 85% range for new vehicles, while used vehicles with financing have declined to 37%, from the same period in 2019. Leases comprised about 26% of all new vehicle transactions in the second quarter, and this is down from the same period in 2019. The analysts said vehicle manufacturers have reduced new promotional activity to drive auto sales.

Lending standards have tightened since 2016, and they tightened slightly through the majority of 2019. They tightened significantly amid the pandemic. Loan terms are slowing rising for new and some used car financing, but some terms are contracting. Credit scores continue to rise year-over-year for used and new car loans. The analysts said this is a positive, “as credit quality should be a bit more defensive within portfolio following a tightening of underwriting standards.” The length of loan terms continues to be a risk as it rises, but it looks to be stabilizing. New car terms rose by 2.4 months. The trend is similar for used vehicle loans.

Average interest rates, or portfolio yields, fell for most new and used car loans. New car rates have fallen in line with federal interest rates; however, used rates have dropped by less than the benchmark. Concerns regarding net interest margin have fallen as rates improved for auto lenders. Yields are expected to rise amid tightening underwriting standards.

The analysts gave Car-Mart stock a hold rating and reduced the 12-month target to $103, from $115.

“(Car-Mart) results have reflected a fast ramp back up, with a larger exposure to states that reopened faster providing a strong tailwind to earnings,” the analysts said. “(Car-Mart’s) business model is a defensive one — the highest losses came in 2007 while its lowest losses were in 2009-2011 given favorable competitive dynamics. 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.”

NEW LENDER AGREEMENT
According to a recent filing with the U.S. Securities and Exchange Commission, Car-Mart amended its loan and security agreement from Sept. 30, 2019, with its lenders. The amendment expands Car-Mart’s borrowing base by removing the limitations on the inclusion in the borrowing base of finance receivable balances on medium- and long-term vehicle contracts. This includes those that have an original term between 36 and 42 months or between 42 and 60 months, respectively. These contracts previously were limited to 15% and 5%, respectively, and an aggregate of 15% of the eligible finance receivable balances.

The amended agreement shows finance receivables from vehicle contracts not exceeding 60 months can be included in the borrowing base calculation. The agreement also allows Car-Mart to make business acquisitions and expand the company’s ability to dispose of real estate, equipment and other property. The company can acquire “strategic targets engaged in the same or a reasonably related business to the company’s business, provided that, among other requirements, the aggregate consideration paid for all acquired businesses in any one fiscal year does not exceed $20 million,” the filing shows. “The amendment also permits the company to dispose of up to $5 million and $1 million of real estate and other property.”

Also, Car-Mart is allowed to select one or more additional lenders with approval from agent BMO Harris Bank in order to increase the revolving line of credit under the agreement’s accordion feature.

Shares of Car-Mart (NASDAQ: CRMT) closed Monday (Nov. 9) at $92.67, up $1.53, or 1.68%. In the past 52 weeks, the stock has ranged between $129.70 and $35.18.

USED PRICES UP
Wholesale used vehicle prices on a mix-, mileage-, and seasonally adjusted basis increased 0.47% in October, from September. The Manheim Used Vehicle Value Index increased 15.4% from October 2019.

Total used vehicle sales declined 5% in October, from the same month in 2019, according to Cox Automotive. The seasonally adjusted annual rate of sales fell to 37.5 million in October, from 39.6 million in the same month in 2019. The rate was 39 million in September. The used retail seasonally adjusted annual rate of sales fell to 20.4 million in October, from 20.6 million in the same month in 2019. The rate was 20.7 million in September.

Used retail supply reached a peak at 115 days on April 8. Normal used retail supply is about 44 days. At the end of October, the supply was 44 days. Wholesale supply reached a peak of 149 days on April 9. Normal supply is 23 days. It was at 26 days by the end of October.

New vehicle sales increased by 0.9% in October, from the same month in 2019. The seasonally adjusted annual rate of sales was 16.2 million in October, down from 16.8 million in the same month in 2019. The rate was down from 16.3 million in September. New vehicle inventories increased to about 2.7 million units in October.

According to the Manheim report, the third-quarter real GDP increase of 33.1% was better than the expected 27% increase. It was the largest quarterly increase in the GDP data. However, the third-quarter increase was “short of the growth needed to see economic output fully recovered,” the report showed. “With the growth, real GDP was down 2.9% year-over-year, which is close to the average 3.3% year-over-year decline experienced during the Great Recession. The economy has recovered a little more than two-thirds of the year-over-year decline created in the second quarter, but the economy is left down by more than any prior recession since (World War II) other than the Great Recession.”

Consumer confidence fell 0.4% in October, according to the Conference Board. Confidence is down 20% year-over-year and down 24% from February. Those with plans to purchase a vehicle in the next six months declined in October to the lowest level since April. The index of consumer sentiment from Morning Consult fell in the last week of October, and the sentiment is down 18.6% from the end of February.

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