Big Investor Bets on Car-Mart's Success

by Marty Cook  on Monday, Jan. 6, 2014 12:00 am  

William H. "Hank" Henderson, president and CEO of America's Car-Mart Inc. of Bentonville.

Several analysts have downgraded shares of America’s Car-Mart Inc. after the Bentonville used-car seller reported quarterly earnings in November.

Car-Mart reported a 20 percent drop in second-quarter earnings, from $7.3 million to $5.8 million, despite a 10 percent increase in revenue, to $121 million. Earnings per share were 61 cents, down 15 cents compared with a year earlier.

But not all investors listen to analysts. One of the company’s major stockholders has purchased an additional 300,000-plus shares.

John Hecht, an equity research analyst with Little Rock’s Stephens Inc., sounded a bit apologetic about Car-Mart being downgraded from overweight to equal weight. Hecht said his earnings projections for Car-Mart dropped approximately 15 percent and that was reflected in Stephens adjusting the stock’s target price from $47 to $40, a bit below the $42 range at which it was trading last week.

“It’s one of the best-managed teams I’ve ever covered,” said Hecht, who works out of San Francisco. “Their success over 30 years is impressive.”

The current analytical ambivalence hasn’t scared off major investors such as Bares Capital Management of Austin, Texas. Bares pumped up its holdings in Car-Mart to 949,986 shares (10.54 percent of the company’s outstanding stock) at the end of November, according to an SEC filing dated Dec. 10. Bares had purchased its original 603,025 shares in September, and the additional purchase means its investment in Car-Mart is worth more than $40 million.

“The investors we have are more long-term focused,” said Car-Mart CFO Jeff Williams. “Analysts are looking at next quarter’s results. When you look at someone who is investing $40-$50 million in your stock, they’re looking down the road.”

Hecht agreed that Car-Mart remains a solid long-term stock investment. Hecht and Williams said continuing low interest rates have made the used-car financing sector highly competitive, diluting Car-Mart’s advantage.

“If you’re a long-term holder, Car-Mart is a great stock to buy,” Hecht agreed. “Car-Mart has really good long-term stockholders. Those guys aren’t going to react to my opinion.”

Williams said the company has tried to stay the course on its business model during the “dark days” of the recession. The only adjustment Car-Mart has made, Williams said, was adding about one month to the length of loans for its repeat customers.

“Short term, it is neutral, maybe negative, but long term, excessive financing is starting to show some cracks,” Williams said. “Lots of money went into car financing. Folks are trying to pile in on loans.

“’You get some irrational loans. We priced the same through good times and bad times. When the competition does some silly things, we’re still doing what we think is the right thing to do.”

Hecht said Car-Mart is in a tough market made tougher by the increased competition. Hecht thinks times should continue to be tough for Car-Mart, which is why Stephens downgraded the stock.

“In my opinion, they’re not going to be able to grow as much,” Hecht said. “Those [other] lenders come in every few years, and they get blown out. They lose money and then they leave. We’re in that part of the cycle.”

Williams said Car-Mart’s long-term focus pays off in this regard. Making a quick profit is enticing, but making risky loans will eventually lose money and hurt a company’s bottom line.

“We’re braced for a continuing tough market from the financing side,” Williams said. “Others are just looking for some yield. It’s a bad deal for everybody for the customer to default.”

This is where Car-Mart’s major stockholders are an advantage, Hecht said. The backers won’t panic, allowing Car-Mart to stay the course and ride out the market turbulence.

“I would never advocate shorting Car-Mart,” Hecht said. “Their stockholders are not going to roll over and sell out. That really helps establish a good base. You’re not going to have people puke it out at the wrong time.”

Williams said Car-Mart is in a tough business, selling cars to people whose finances are not always stable or robust. That makes Car-Mart’s stability critical. “We’ve done a pretty good job in a very tough environment,” Williams said. “There’s a lot of risk in it. We take a lot of risks on folks.”



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