America’s Car-Mart (NASDAQ: CRMT) Showing Fundamental and Technical Green Lights

America’s Car-Mart (NASDAQ: CRMT), a US automotive retailer that sells used cars and finances the purchases, has roared back to within striking distance of February levels after losing more than three-quarters of its value between mid-February and mid-March.

The company, which operates 148 dealerships in the South-Central United States, has seen sales dip, but not nearly as much as originally feared.

Even after nearly tripling off the lows, CRMT shares remain an excellent value at current levels.

A Record Q4 2020

CRMT shares jumped after reporting record numbers in Q4 2020 (the company’s 2020 fiscal year ended on April 30, 2020).

Revenue increased 10.6% yoy to $196 million, even though sales in the second half of the quarter were impacted by the pandemic.

On the earnings call, CEO Jeffrey A. Williams said, “Basically February was the first month in our last quarter and we had a very strong February. And we had a good first half of March. And for March and April both of those months were down maybe low double-digits. So, not nearly down as much as the rest of the market, but we were down a little bit.”

Williams went on to say that, “Our sales are down just a little bit in May in line with where we were for March and April.”

The overall strong Q4 performance was largely due to a 9.8% average selling price increase, with sales volumes only increasing by 1.7%.

Gross profit per retail unit sold increased 7.8% yoy to $5,232, but gross profit percentage dipped by 20 basis points to 40.5%. CRMT actually sees lower gross margin percentages at higher selling prices, so this is nothing unusual.

Most of the vehicles sold last quarter were purchased by CRMT prior to the onset of the pandemic, which bodes well for margin expansion in the coming quarters. You see, vehicle purchase prices have decreased over the past few months. With sales holding up relatively well, and with a solid balance sheet, CRMT has taken the opportunity to selectively add vehicles to its inventory at bargain prices.

Customers Are Still Making Payments… But For How Long?

America’s Car-Mart reported collections as a percentage of average finance receivables at 15%, close to the 16% ratio during the same quarter a year-ago. And the increase in average selling price was responsible for 40% of the decline in the ratio, as a higher average selling price leads to longer contract terms.

It would be easy to stop at that point, but there are potential reasons for concern:

• Customers are flush with cash from tax refunds during CRMT’s Q4.
• Stimulus checks helped customers remain current with payments; CRMT noted an uptick in collections when the checks started going out.
• Those that are unemployed are receiving historically large unemployment benefits.

What happens if government support is scaled back (or halted) before unemployment returns to pre-pandemic levels?

It could certainly lead to increased delinquencies for CRMT.

But I don’t think you should be overly concerned. It seems that the federal government will continue to support struggling Americans until the economy recovers.

CRMT Offers Solid Long-Term Growth at an Attractive Price

Turning our attention to forward earnings projections, CRMT is trading at around 13x projected 2021 earnings and 10.5x projected 2022 earnings.

Those ratios would be attractive if revenue and earnings had been flat over the past few years – and were expected to remain flat moving forward.

But America’s Car-Mart has seen revenue and EBITDA both grow at CAGRs of around 7% over the past five years. Even if that growth is cut in half moving forward, CRMT could look like an absolute bargain at current levels in 3-4 years.

So Where Can You Get In?

Even though CRMT currently trades at nearly triple its March lows, shares aren’t currently extended.

In mid-July, after trading between around $80 and $95 for a month, shares broke out on above-average volume, and ran up to over $104. Over the past six sessions, CRMT has pulled back to the breakout point.

In Friday’s session, shares dipped to $92.50 before closing just above $95. On top of that, the 50-day moving average is about to cross over the 200-day moving average, which would be a bullish sign.

And both of those moving averages are around $89, so you can look to get in around Friday’s close and put a stop-order around $88, giving yourself a downside of a little under 8%.

America’s Car-Mart Fundamental and Technical Green Lights

America’s Car-Mart is a strong buy right now.

At current levels, it offers a reasonably valued company with solid long-term revenue and earnings growth, along with a nice entry point that offers a clear line in the sand for your stop order