America's Car-Mart (CRMT) Post Q2 Earnings: Buy, Sell, or Hold?

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America's Car-Mart (CRMT) Post Q2 Earnings: Buy, Sell, or Hold?

Shareholders of America's Car-Mart would probably like to forget the past six months even happened. The stock dropped 35% and now trades at $42.03. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in America's Car-Mart, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Even with the cheaper entry price, we're cautious about America's Car-Mart. Here are three reasons why there are better opportunities than CRMT and one stock we like more.

Why Is America's Car-Mart Not Exciting?

With a strong presence in the Southern and Central US, America’s Car-Mart (NASDAQ:CRMT) sells used cars to budget-conscious consumers.

1. Low Gross Margin Reveals Weak Structural Profitability

At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.

America's Car-Mart has poor unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 16% gross margin over the last two years. That means America's Car-Mart paid its suppliers a lot of money ($83.99 for every $100 in revenue) to run its business.

America's Car-Mart Trailing 12-Month Gross Margin
America's Car-Mart Trailing 12-Month Gross Margin

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) tells us whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for America's Car-Mart, its EPS declined by 23.1% annually over the last five years while its revenue grew by 15.2%. This tells us the company became less profitable on a per-share basis as it expanded.

America's Car-Mart Trailing 12-Month EPS (Non-GAAP)
America's Car-Mart Trailing 12-Month EPS (Non-GAAP)

3. High Debt Levels Increase Risk

As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.

America's Car-Mart’s $184.8 million of debt exceeds the $4.75 million of cash on its balance sheet. Furthermore, its 6x net-debt-to-EBITDA ratio (based on its EBITDA of $29.35 million over the last 12 months) shows the company is overleveraged.

America's Car-Mart Net Debt Position
America's Car-Mart Net Debt Position

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. America's Car-Mart could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

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