Analysts say Car-Mart earnings, revenue to rise amid positive market trends

Rogers-based America’s Car-Mart is expected to post increases in revenue and earnings in the second quarter of fiscal 2022 amid strong vehicle values, favorable credit and tight inventory in the used car market.

After the markets close Wednesday (Nov. 17), the buy here, pay here used car dealer is projected to report earnings for the period ending Oct. 31 to rise to $3.20 per share, from $3.05 per share in the same period last year, based on a consensus of four analysts. Revenue is expected to increase by 32.9% to $296.76 million, from $223.36 million.

In an earnings preview, equity analysts John Hecht, Kyle Joseph, Ryan Carr and equity associate Lance Jessurun, all of Jefferies, expect earnings and revenue to rise as a result of higher sales volumes and interest income.

On credit, the analysts expect loss rates to rise. They also expect gross adjusted margin on car sales to fall slightly. Both vehicle sales and average sales price are projected to increase while sales continue to be impacted by low supply and ongoing supply chain issues, the analysts added.

“(Car-Mart) has effectively navigated an evolving used car market and remains well-positioned competitively vs. indirect lenders and other (buy here, pay here) operators,” according to the analysts. “Credit remains solid, and (Car-Mart) has effectively controlled costs.”

In its first-quarter earnings call, Car-Mart management reemphasized its shift from a collections company to a sales company that can collect, the analysts noted. “We believe this entails greater investments in procurement and sales/marketing and ultimately see this increasing overall customer count.”

Some of the short-term impacts on Car-Mart include elevated used car prices, which have offsetting impacts on the business, and tightening credit, which should support sales, according to the analysts.

The analysts maintained a hold rating on Car-Mart stock and decreased the 12-month target price to $135.

Shares of Car-Mart (NASDAQ: CRMT) were trading Thursday (Nov. 11) at $127.34, up 40 cents or 0.32%. In the past 52 weeks, the stock has ranged between $177.45 and $93.65.

BROADER TRENDS
According to Hecht, Joseph, Carr and Jessurun, auto lenders can expect supportive trends to continue as vehicle values have remained strong and loan values rise. For the remainder of 2021, supportive factors are expected with strong vehicle pricing and net charge offs likely not becoming an issue until later in 2022 amid excess household savings, the analysts said.

Demand has moderated slightly, but levels remain near record highs, according to the analysts. Vehicle values began to fall in early summer before starting to rise in the second half of August. In the short term, higher prices are expected amid tight vehicle supply. This could continue into next year with limited off-lease supply.

In the third quarter, used vehicle sales prices rose as more people struggled to find an affordable new vehicle, in part as a result of supply shortages affecting the automotive industry, the analysts said. The average used vehicle transaction is expected to increase to a record high of $27,306 in the coming months, up more than 5% from last year. New car demand has been strong, but the supply is tight, the analysts noted.

Net charge-offs were up 0.1 percentage points in August, but losses remain lower than expected. Delinquencies increased by 0.04 percentage points.

The increasing term lengths of average loans for those with lower credit scores have been “an ongoing element of industry risk,” according to the analysts. However, they noted the rising term lengths are partly a result of cars lasting longer, and the longer terms can reduce the monthly payment.

In October, the Manheim Used Vehicle Value Index rose by 38.1% to 223.7 from the same month in 2020. Wholesale used vehicle prices increased by 9.2% in October, from September. Some of the monthly increase can be attributed to the seasonal adjustment as vehicles typically depreciate more in October and used prices decline. This October was the first October the index experienced a non-seasonally adjusted price increase. The index, which was started in 1997, had a non-adjusted price increase of 5.4% in October.

According to Cox Automotive, total used vehicle sales fell by 10% in October, from the same month in 2020. The seasonally adjusted annual rate of sales fell to 35.9 million in October, from 39.9 million in the same month in 2020. The rate was flat from September. The seasonally adjusted annual rate of sales for used retail fell to 19.6 million in October, from 21.1 million in the same month in 2020. The rate was flat from September.

Used retail vehicle supply ended October at 39 days, below normal levels, according to vAuto data. Wholesale vehicle supply ended October at 18 days, also below normal levels.

New vehicles sales declined by 23% in October, from the same month in 2020, according to Cox Automotive. The sales rose by 4% from September. The seasonally adjusted annual rate of sales declined to 13 million in October, from 16.4 million in the same month last year. The rate was 16.7 million in October 2019.

Consumer confidence increased by 4.1% in October, nearly offsetting the decline in September, according to the Conference Board. The confidence remains down 14.2% from February 2020. October was the first increase since June. Plans to purchase a vehicle in the next six months rose to a level that’s higher than one year ago. Plans to purchase a home also improved to the highest level since February and rose from October 2020.

Other sentiment indexes fell in October. The sentiment index from the University of Michigan declined by 1.5%, while the Morning Consult daily index fell by 1.7%.