Rationalwalk, thanks for the write-up. Couple of questions from me:
1) Company mentioned they have healthy balance sheet but how should we properly assess balance sheet risk here? Briefly looking at their liquidity and working capital needs, 10m of unrestricted cash + 121m from revolver but cash burn is ~150m as of latest FY23. 70% of finance receivables has already been tapped for liquidity. Adjusting for FV of receivables, tangible book equity could come down to (200m to 300m) range. Cheap but how much cushion is left? You also pointed out to inflated inventory which compounds onto balance sheet risk.
2) Finance receivables on balance sheet is not recorded on FV basis. Even on a FV basis (844m compared to 1073m), it this conservative enough? CRMT sells its receivables to Colonial (subsidiary) at 38% discount.
3) Wholesale margins has been negative (-200bps iirc). Given used vehicles are longer on the road, service costs should rise. Material and wage inflation coupled with decreasing ASP of used cars should see GM depressing?
What do you think about their skyrocketing interest expense? They used to spend about $7M in interest expenses in a year. Currently, they spent that amount in a quarter and I wouldn't be surprised if it goes up even more.
A lot of their growth has been financed with debt in the last 2 years. They had ~$230M of debt in 2021 and now it's over $500M. So, they are being hit from both sides: more debt and higher interest rates.
I think it's something you might have missed in your analysis of the latest results.
"What are some of the problems that could occur in the used car industry if used car prices start to decline precipitously?"
In addition to the items mentioned, I am not sure why I did not include the most obvious potential problem: depreciating inventory.
Inventory has increased a lot in recent years and stood at $145.2 million as of 7/31/22 compared to $36.4 million at 4/30/20 before all of this used car inflation.
Car-Mart is doing more business today than pre-pandemic in terms of unit volume but clearly the balance sheet increase in inventories is mostly attributable to inflation. If there is deflation that occurs in a gradual manner, that's probably ok. But if there is large deflation -- like 10-20% in a month or two -- then perhaps Car-Mart's gross margins will decline significantly and/or a charge for an inventory write-down will occur.
Perhaps investor skepticism regarding the valuation of inventory accounts for the current modest discount to tangible book value.
Rationalwalk, thanks for the write-up. Couple of questions from me:
1) Company mentioned they have healthy balance sheet but how should we properly assess balance sheet risk here? Briefly looking at their liquidity and working capital needs, 10m of unrestricted cash + 121m from revolver but cash burn is ~150m as of latest FY23. 70% of finance receivables has already been tapped for liquidity. Adjusting for FV of receivables, tangible book equity could come down to (200m to 300m) range. Cheap but how much cushion is left? You also pointed out to inflated inventory which compounds onto balance sheet risk.
2) Finance receivables on balance sheet is not recorded on FV basis. Even on a FV basis (844m compared to 1073m), it this conservative enough? CRMT sells its receivables to Colonial (subsidiary) at 38% discount.
3) Wholesale margins has been negative (-200bps iirc). Given used vehicles are longer on the road, service costs should rise. Material and wage inflation coupled with decreasing ASP of used cars should see GM depressing?
What do you think about their skyrocketing interest expense? They used to spend about $7M in interest expenses in a year. Currently, they spent that amount in a quarter and I wouldn't be surprised if it goes up even more.
A lot of their growth has been financed with debt in the last 2 years. They had ~$230M of debt in 2021 and now it's over $500M. So, they are being hit from both sides: more debt and higher interest rates.
I think it's something you might have missed in your analysis of the latest results.
"What are some of the problems that could occur in the used car industry if used car prices start to decline precipitously?"
In addition to the items mentioned, I am not sure why I did not include the most obvious potential problem: depreciating inventory.
Inventory has increased a lot in recent years and stood at $145.2 million as of 7/31/22 compared to $36.4 million at 4/30/20 before all of this used car inflation.
Car-Mart is doing more business today than pre-pandemic in terms of unit volume but clearly the balance sheet increase in inventories is mostly attributable to inflation. If there is deflation that occurs in a gradual manner, that's probably ok. But if there is large deflation -- like 10-20% in a month or two -- then perhaps Car-Mart's gross margins will decline significantly and/or a charge for an inventory write-down will occur.
Perhaps investor skepticism regarding the valuation of inventory accounts for the current modest discount to tangible book value.