3 Reasons to Steer Clear of CRMT and One Alternative Stock Worth Buying

America's Car-Mart: Recent Performance and Investor Concerns

Investors in America's Car-Mart have faced a challenging half-year, with the company's share price plummeting by 55.6% to $20. This sharp decline followed disappointing quarterly earnings, leaving many shareholders uncertain about the best course of action moving forward.

Should you consider adding America's Car-Mart to your investment portfolio, or is caution warranted?

Reasons for a Cautious Outlook on America's Car-Mart

Despite the stock's lower price, we are choosing to remain on the sidelines. Below are three key factors influencing our decision to avoid CRMT, along with an alternative stock we prefer.

1. Declining Same-Store Sales Reflect Weakening Demand

Same-store sales track the year-over-year revenue changes for established retail locations and online platforms, serving as a vital indicator of organic business growth.

For America's Car-Mart, same-store sales have decreased at an average annual rate of 4.6% over the past two years, signaling a drop in customer demand.

2. Earnings Per Share (EPS) on a Downward Trajectory

Long-term trends in earnings per share reveal whether a company is generating profit from its additional sales. Sometimes, revenue growth can be misleading if it's driven by heavy marketing expenses.

Unfortunately, America's Car-Mart has seen its EPS fall by an average of 74.7% per year over the last three years, even as revenue inched up by 1.6%. This suggests that the company's profitability per share has eroded during its expansion.

3. Elevated Debt Poses Financial Risks

While debt can amplify returns, excessive borrowing increases the risk of financial distress. As long-term investors, we prefer to steer clear of companies that are highly leveraged, as this can threaten their stability.

America's Car-Mart currently holds $1.54 billion in debt, far surpassing its $251 million cash reserve. Its net-debt-to-EBITDA ratio stands at 21 times, based on $60.65 million in EBITDA over the past year, indicating significant overleveraging.

At such high debt levels, borrowing becomes more costly, and a dip in profitability could prompt credit rating downgrades. If market conditions worsen, the company could find itself in a precarious position—something we aim to avoid when seeking quality investments.

We remain hopeful that America's Car-Mart will strengthen its financial position, but for now, we advise caution until the company either boosts its profits or reduces its debt burden.

Our Verdict

America's Car-Mart does not currently meet our standards for a high-quality investment. After its recent drop, the stock trades at a forward P/E of 60.5 (or $20 per share), a valuation that already assumes significant positive developments. We believe there are more attractive opportunities available. For example, consider a leading digital advertising platform benefiting from the creator economy.

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