Description

After being written up twice in the past, it is once again time to take a ride in CarMart. On the previous two occasions, CRMT has doubled after being touted here. While, I don't see an immediate double, I look for the stock to sell in the 30's within 3-4 months.

An in-line, but "noisy" quarter has taken the stock from a high of nearly 34 1/2 in October down to the mid twenties. Investors were frightened because credit losses came in at the high end of their historical range. The stock had had a huge move and I believe momentum players played a role in pushing the stock ahead of itself. Now that the froth has come off, the stock is poised to begin moving up when it becomes clearer that the blip in credit losses was just noise.

The third quarter of fiscal '04 ends Jan 31. I expect these results to comfort those spooked about the credit issues in the most recent quarter.
With a more positive backdrop, I would not be surprised to see the Board implement a stock split.

Another upside to future earnings is the possibility of Federal action that would invalidate Arkansas' usury laws. 2/3ds of receivables have been originated in Arkansas. State law sets a maximum rate of the Federal primary credit rate (2% now) + 5 %. I believe CRMT charges substantially higher interest rates in other states where they do business. The company's lobbyists believe that there is little opposition to the proposed Congressional Bill that would invalidate Arkansas' statute, but predicting the timing is difficult.

If you don't recall from previous write ups, CRMT is one of the largest operators of "buy here, pay here" used car lots in the US. Based in Bentonville, Arkansas, CRMT opearates 68 lots, selling affordable transport to credit impaired customers in small towns across several southern states.

Car Mart was formed in 1981 and has operated profitably ever since. When a founder became ill in 1998, the family decided to sell to Crown Group (the predecessor to CRMT). Crown's management was so impressed by what they had purchased that they decided to sell off their ancillary businesses and the change the company's focus and name to America's Car Mart.

This is a business where trust is important and often lacking. I find it interesting that the company's corporate policy is to only hire people from OUTSIDE the used car business. A high % of repeat business indicates that customers don't feel like they are being taken advantage of. And, with 22 straight years of profitablility I would think that serious problems would have surfaced by now. The company's bank recently reduced the interest rate and extended the term of their credit facility, hardly a sign of a ticking credit bomb. It is hard to tell for sure, but having met Hank Henderson (President of Car Mart), I felt he was a fresh faced, clean cut, straight shooter. No gold chain, or pinkie rings, thank you.

This is an execution business. CRMT's been executing for 22 years despite all the subprime problems. They operate in small towns and know their customer. Lot managers' compensation is dependent on collections, not just sales. A relentless focus on collections is the key to the business and I think they can continue to maintain and sharpen that focus.

Competing mostly against mom and pops and small regionals, CRMT should be able to leverage their brand name, professionalism and experience to take share and grow. The company believes, over the long term, they can grow EPS at 16-18% per annum, somewhat below historical rates.

CRMT's FY 2004 ends in April. They should earn $2.06 per share or so with 2.40 expected for FY 2005. At 26.70, that's 13x and 11x '04 and '05 earnings, a healthy discount to the company's high teens growth rate. In this market, companies with those growth metrics garner far higher PE's. For example, Car Max, a higher end used car retailer, sells for 23x next year's numbers.

a 15x multiple on next year's 2.40 per share earnings puts the stock at 36. And 2.40 is likely to be low.

Catalyst

earnings reports will reassure skittish investors
possible stock split
abolishment of AR usury law would improve fundamentals in largest market