What a brutal six months it’s been for America's Car-Mart. The stock has dropped 93.4% and now trades at $0.83, rattling many shareholders. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy America's Car-Mart, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why do we think America's Car-Mart will underperform?
Even though the stock has become cheaper, we don’t have much confidence in America's Car-Mart. Here are three reasons we avoid CRMT, plus one stock we’d rather own.
1. Shrinking same-store sales indicate waning demand
Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
America's Car-Mart’s demand has been shrinking over the last two years as its same-store sales have averaged 10.1% annual declines.
2. EPS trending down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for America's Car-Mart, its EPS declined by 92.3% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. Restricted access to capital increases risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
America's Car-Mart posted negative $73.16 million of EBITDA over the last 12 months, and its $896.7 million of debt exceeds the $110 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
We implore our readers to tread carefully because credit agencies could downgrade America's Car-Mart if its unprofitable ways continue, making incremental borrowing more expensive and restricting growth prospects. The company could also be backed into a corner if the market turns unexpectedly. We hope America's Car-Mart can improve its profitability and remain cautious until then.
Final judgment
America's Car-Mart falls short of our quality standards. After the recent drawdown, the stock trades at 24.6× forward EV-to-EBITDA (or $0.83 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. We’d recommend looking at one of our top software and edge computing picks.
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