America's Car-Mart: Great Vehicle for Tough Times

A friend of mine called on Tuesday and casually mentioned that his friend wanted to start a "buy here, pay here" used car dealership in response to the plunging availability of financing for automobiles.  I responded that I believed that there was a publicly traded company that did as much and quickly recalled its name:  America's Car-Mart (CRMT) (16.33, $192mm market cap).  I took a quick glance at the financials and immediately saw a decent balance sheet, good long-term historical growth, and an extremely low valuation.  I promptly ended the phone call and did about the fastest due dilligence that I have ever done.  Fortunately, the stock held steady and I got what I think was an absolute steal.

For those who follow my investment process, I almost always watch a stock for a while before buying it.  I maintain a watchlist of 100 stocks that I tend to update regularly.  I also have a secondary list that I monitor via a screen.  I actually bought a stock out of that group this week too: American Ecology (ECOL).  In any event, I jumped on CRMT despite my lack of familiarity with it after reading several of its SEC filings and realizing that I really blew it a couple of weeks ago by missing this one when I addressed "Four Ways to Profit from Tight Auto Lending".  In fact, CRMT might be one of the best.

In a crazy market, one has to act quickly at times, and I did.  Here is what I saw at the time:

1. Strong Balance Sheet

• No short-term debt
• Debt to Capital of 23%
• Good FCF generation for the past several years
• Minimal CapEx requirements (1-2% of sales)

    2.    Steady Sales Growth (12% compound growth for 5 years

    3.    Large Inside ownership (17%)

    4.    Simple Business Model

    5.    Very Cheap Valuation

• P/TB was 1.1X when I bought (1.3X now)
• Forward PE was 7.5X (9.6X now)

Here is a look at several valuation parameters over the past 10 years:

    

Download CRMT.jpg

As you can see, valuation is fair to slightly cheap depending upon which measure one uses.  In this market, though, its "cheapness" certainly doesn't stand out from the crowd.  So, why do I like this little company?  I think that it will do very well in this weak economic environment.  I also like that this stock isn't exactly an undiscovered gem, as it has coverage by 5 analysts and trades just under 300K shares a day typically. I expect that this one could snap back quickly and have a target of 22 over the next year (just 11X my projected 2010 earnings, which isn't exactly rich).  I don't expect the stock to reach the 12.50 level again, but perhaps it dips as low as 14, where I would be more aggresive in adding to my position.

As I highlighted in that previous article, capital available to buyers of automobiles is rapidly shrinking (along with the number of dealers).  CRMT, which is based in Bentonville, AR and seems to follow its neighbor's (WMT) original real estate strategy, operates in just 8 states in the South/South Central region, an area that isn't suffering from plunging home prices.  Its stores tend to be in smaller towns, where mass transit isn't exactly an alternative option.  The company knows its customer base well and understands how to serve these credit-impaired clients.  In fact, it apparently tends to do a lot of repeat business.  The company has been lowering its cost of new used vehicles but seeing slightly higher gross margins (48% for the past three quarters).  Besides understanding its customers, the company appears to excel at managing credit risk, though it did stumble in 2006.  Here are some characteristics of the business:

• 91 stores
• Decentralized operations
• Low-end/basic cars
• 7% down payment on average
• 27-month term on average
• 13% A.P.R. on average

Perhaps I am being too simplistic, but it seems like CRMT will be facing a lot less competition in the near-term.  New cars are more expensive, and there isn't a lot of financing available.  In the used car market, again, there isn't a lot of financing available.  CRMT, which generates enough free cash flow to internally fund its own loans, should pick up market share.  While it sounds like they won't be opening new stores in the near-term, the longer-term growth thesis would include a continuation of the company's long history of expansion.  For those who might be worried on the credit front, used car prices have stabilized lately and seem likely to hold value given the dynamics of lower production of new cars and limitations of credit that will drive buyers to lower priced used cars.  If one feared high unemployment in rural towns, then one might not want to take the exposure via CRMT.  Given the low valuation, the strong balance sheet and the likelihood that this company will actually be helped by the weaker economy, I believe that CRMT looks compelling.

Disclosure:  Long CRMT

Comments

[Leisa Dreps]

In terms of confidence, it’s safe to say that this company will turn out stronger this year than the last because of what they pulled off to stay afloat during the recession. It will be a great help if they can lend a hand to shops that are steadily getting a foothold in the market.