America's Car-Mart’s stock price has taken a beating over the past six months, shedding 35% of its value and falling to $28.37 per share. This was partly due to 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? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
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 you should be careful with CRMT and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.
America's Car-Mart’s demand has been shrinking over the last two years as its same-store sales have averaged 4.2% annual declines.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
America's Car-Mart’s full-year EPS dropped 407%, or 38.3% annually, over the last five years. In a mature sector such as consumer retail, we tend to steer our readers away from companies with falling EPS because it could imply changing secular trends and preferences. If the tide turns unexpectedly, America's Car-Mart’s low margin of safety could leave its stock price susceptible to large downswings.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
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 burned through $43.07 million of cash over the last year, and its $1.55 billion of debt exceeds the $121.4 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the America's Car-Mart’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of America's Car-Mart until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
America's Car-Mart doesn’t pass our quality test. After the recent drawdown, the stock trades at 6.9× forward P/E (or $28.37 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d suggest looking at one of our top digital advertising picks.
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