Gene Marcial's Stock Picks

Marcial: America's Car-Mart, a Lot to Like


America's Car-Mart (CRMT) and giant retailer Wal-Mart (WMT) have one common theme: They sell consumer products at the lowest price possible. Both are based in Bentonville, Ark., but America's Car-Mart sells used cars through 96 car dealerships in the Southern and Central states, including Texas, Mississippi, and Oklahoma. Some 50% of its sales come from Arkansas. For a company operating in the recession-crunched car business, Car-Mart's shares are performing admirably, rising to 22 a share on Nov. 17. A year ago the stock was in the cellar, trading as low as 6.88. "Amazingly, Car-Mart continues to beat analysts' earnings forecasts," says Nikolai D. Fisken, director of research at investment bank Stephens, although the company caters to buyers who have either damaged credit histories or no credit scores at all. Car-Mart is the largest U.S. used-car marketer with a "buy here/pay here" policy, which makes it easy for the company to keep track of its customers. Most of them have no credit cards, so they come to the dealers' locations to pay their car loans. Car-Mart provides its own credit facilities to its customers, charging interest rates from 4.5% to 19%, according to analyst David Burtzlaff of Stephens. In that way, it is able to require low down payments from its customers, he adds. One of Car-Mart's big attractions for its customers: Unless the price of the car exceeds $10,000, the company doesn't require them to submit any credit history. Profits Expected to Keep RisingBurtzlaff notes that Car-Mart has posted steadily rising profits since 2007, with gross margins last year of 43%. Car-Mart doesn't worry much about payment defaults on its low-priced cars. "The repossession ratio is quite low, at about a third of loans issued," notes Burtzlaff. The repossessed cars are either put back in the car lot, depending on their condition, or sold in the wholesale market. "Car-Mart continues to see good traffic on the lots," says the analyst, who forecasts unit sales in its fiscal 2010 second quarter to jump 12% from a year ago, and for revenues to leap 14.5%, to $74.9 million. For all of fiscal 2010 (ending Apr. 30), Burtzlaff estimates sales rising to $306.8 million, and to $334.9 million in fiscal 2011, up from $273.3 million in fiscal 2009. Fully diluted earnings are also on the rise, notes the analyst, who forecasts $2.05 a share in fiscal 2010 and $2.35 in fiscal 2011, up from fiscal 2009's $1.52. Based on his sales and earnings forecasts, Burtzlaff rates the stock overweight and puts his 12-month target for the stock at 30 a share. The economic downturn has been good for Car-Mart's discounted price policy, "and the company is also well-positioned to gain market share as the economy improves," he adds, as it expects more customers to come to its car lots. Independent investment research outfit PriceTarget Research gives Car-Mart its highest buy rating of A, with a price target of 41. The research company cites Car-Mart's favorable earnings performance as well as the recent price action of its stock. A Few Big Institutional InvestorsAlso bullish on Car-Mart is analyst William R. Armstrong of investment firm C.L. King & Associates, who rates the stock a strong buy. "Car-Mart has by far the highest margins and greatest growth potential of any publicly traded automotive retailer," says Armstrong. He says his strong buy reflects not only management's "greatly improved execution in sales, underwriting, collection, and purchasing, but the fact that current economic conditions are actually lined up favorably for the company." Sadif Investment Analytics, another independent research firm, says that when compared with its closest peer, CarMax (KMX), "America's Car-Mart shows similar undervaluation and is equally likely to outperform the market." Also a bull is analyst John Hecht of JMP Securities, who calls Car-Mart, which he rates a buy, "a great company" in the besieged car retailing business. Wall Street has yet to discover the used-car retailer, or follow it closely, with only five analysts covering it. Three of the five recommend buying the stock and two rate it a hold. But some big institutional investors are already on the lot. Barclays Global Investors owned a 4.6% stake as of Sept. 30, 2009, according to Bloomberg. Other big stakeholders are Dimensional Fund with 4.5% and the Vanguard Group with 3.5%. Investors who may not want to buy used cars on the cheap could still find a bargain in Car-Mart's stock. And if the company stays on its growth track, who knows? Maybe one day it will become the second behemoth from Bentonville. Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.
Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.

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