America's Car-Mart CRMT
January 20, 2002 - 1:30pm EST by
2002 2003
Price: 7.14 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 48 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Crown Group is a holding company that has been a consistently strong financial performer, selling below book value and often at a P/E ration of 2-3. In FY 1999, ending April 30, 1999, Crown had pre-tax income of $25.9 million; in FY 2000, $25.6 million; in FY 2001, $10.8 million. It has never achieved any respect on Wall Street because the company has never been more than an earnings machine, buying and selling diverse businesses without a consistent theme other than strong profitablility. As a result, it has been difficult to assign a "sector" to Crown, and it has never achieved the following of even a second-tier regional anlayst community.

Historically, Crown has been involved in many businesses. It started out in the 1980s with cable television. After making money in that business, it sold cable operations in the early 1990s, and move on to riverboat casino opportunities. Crown got out of the riverboat gambling business before the collapse, and used the profits to move into various diverse businesses. They included a majority stake in Paaco Automotive Group, Inc., a vertically integrated used car sales and finance company, the acquisition of Precision IBC, a supplier of intermediate bulk containers to industrial and manufacturing concerns, and the formation of Concorde Acceptance Corporation, a sub-prime mortgage lender. Crown also made a $1 million investment in Inktomi just befor its IPO, and once again exited before the crash, netting a $25 million profit.

Crown has now decided to "grow up" by devoting itself to one line of business. In January 1999, the Crown acquired America's Car-Mart, Inc., a vertically integrated used car sales and finance company. While not a glamorous business, it has been consistently profitable because of its focus on an underserved part of the market. Car-Mart targets credit-impaired borrowers (C and D paper) living in small towns (15,000 to 50,000 population) who, due to low income, poor or limited credit historiesare unable to receive traditional lines of credit. Although you read about trouble in the C and D paper market, Car-Market has succeeded by by a vertical integration strategy where lot managers do not try to increase sales volume at the expense of collection and underwriting functions. Car-Mart also maintains strict underwriting guidelines and aggressive collection procedures for overdue accounts, including contacting customers when a payment is one day late and educating borrowers on good credit practices. Most customers make weekly cash payments in person providing an opportunity for face-to-face contact and underscoring the importance of repayment. From an accounting perspective, Crown keeps bad debt reserves at 18% of revenue. Had Car Mart been Crown's only business in FY 2001, it would have earned approximately $1.16 per diluted share, compared with actual reported earnings of $0.74 per diluted share. The name of the Company will be changed to America's Car-Mart, Inc., and overhead expenses of the holding company will be cut. The remaining businesses will be sold, which should leave plenty of capital to reduce D/E ration from 3.6 to less than 1, and fund future growth.

Crown is now a growth company, albeit in a perhaps unattractive industry. Over the last six years, Car Mart has earned $43 mil, $58 mil, $65 mil, $76 mil, $89 mil and $105 mil. One can argue that this kind of consistent growth deserves a P/E of 15-20. But if Crown can get a P/E of just 10, it will provide a nice return to investors.


New focus on a single business that has been consistently profitable for 20 years. The new business is not only profitable, but has grown organically from one location to 52 locations in 7 states. Over the past six years, Car-Mart has grown revenues and earnings at compound annual growth rates of 19.4% and 21.7%, respectively. Continued growth can be expected. The combination of a low p/e business with strong growth prospects in an identifiable industry should attact regional coverage for the stock and boost its price.
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