Subprime Exposure And Inventory Limits Will Impair Stability

Key Takeaways

• Growth in affordable used car demand and improved digital processes support long-term prospects, but capital constraints and subprime exposure may limit sales and margin recovery.
  
• Geographic concentration, supply chain volatility, and threats from digital-first competitors and electric vehicles create structural risks to consistent future earnings potential.
  
• Heavy exposure to credit-challenged customers, regional concentration, rising costs, and limited financing flexibility create persistent risks to growth, margins, and competitive positioning.

Catalysts

Through its subsidiaries, operates as an automotive retailer for the used car market in the United States.

• While growing demand for affordable used vehicles and persistent difficulties in consumer credit access should support America's Car-Mart's long-term revenue growth, ongoing capital constraints and limited inventory advance rates could continue to restrict sales volumes, limiting revenue recovery even as demand remains high.
  
• Although enhanced data analytics, risk-based pricing, and digital tools like LOS V2 and Pay Your Way are improving underwriting and collections efficiency-which could favorably impact margins and cash flow-the company remains overexposed to high-risk subprime borrowers, and any rise in defaults or tighter lending regulations may offset anticipated gains in net margins.
  
• While demographic trends and population growth in the South and Midwest could enable successful store expansion, America's Car-Mart's geographic concentration and relatively limited scale may continue to expose it to localized economic downturns, restricting the consistency and resilience of long-term earnings.
  
• Even as industry-wide supply constraints for new vehicles and Car-Mart's value-focused approach boost near-term used car prices, volatility in procurement and wholesale pricing-such as the impact from tariffs and ongoing macroeconomic uncertainty-could create margin compression and operational headwinds over the long run.
  
• While investments in digital and omnichannel capabilities are beginning to improve operational efficiency, rising competition from fully digital auto retailers and possible acceleration in the adoption of electric vehicles threaten to erode America's Car-Mart's traditional business model and pose structural risk to its future revenue and earnings potential.

America's Car-Mart Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on America's Car-Mart compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming America's Car-Mart's revenue will grow by 3.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.0% today to 3.1% in 3 years time.
• The bearish analysts expect earnings to reach $47.6 million (and earnings per share of $5.59) by about September 2028, up from $13.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.4x on those 2028 earnings, down from 22.8x today. This future PE is lower than the current PE for the US Specialty Retail industry at 19.2x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

America's Car-Mart Future Earnings Per Share Growth

Risks

• The company's reliance on subprime borrowers and credit-challenged consumers introduces structural risk, as evidenced by persistent increases in net charge-offs and delinquencies, which could threaten future net margins and undermine earnings stability if macroeconomic pressures persist or worsen.
  
• America's Car-Mart's growth is constrained by working capital and inventory financing pressures, as demonstrated by the low advance rate and cap on its revolving credit facility, which, if unresolved, could continue to stunt retail sales growth and depress revenues over the long term.
  
• Rising procurement costs, driven by tariffs and wholesale price increases, have created downward pressure on inventory capacity and sales volumes; continued industry pricing volatility or inflation could erode gross margins and limit earnings potential.
  
• The company's geographic concentration in rural Southeast and Midwest markets exposes it to regional economic downturns or demographic shifts, which may reduce its growth potential and make it more vulnerable to localized revenue declines than nationally diversified competitors.
  
• While recent investments in digital infrastructure and underwriting aim to modernize operations, America's Car-Mart risks falling behind technologically advanced online auto retailers or larger omnichannel competitors, potentially causing long-term customer attrition, higher SG&A costs, and compressed profitability.

Valuation

• The assumed bearish price target for America's Car-Mart is $45.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of America's Car-Mart's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $58.0, and the most bearish reporting a price target of just $45.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $47.6 million, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $36.11, the bearish analyst price target of $45.0 is 19.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.