Shares of America’s Car-Mart (NASDAQ: CRMT) have plunged 35% over the past six months, leaving investors questioning whether the stock’s sharp decline presents a buying opportunity or a significant risk. Currently trading at $42.03, the drop has been fueled by softer quarterly results and broader concerns about the company’s fundamentals.
While the discounted stock price may entice some, a closer look at America’s Car-Mart raises red flags. Here are three reasons why investors may want to consider alternatives, as well as one stock that offers more promise.
Why America’s Car-Mart Lacks Appeal
1. Weak Gross Margins Reflect Structural Challenges
Gross margin is a key indicator of profitability and pricing power. Unfortunately, America’s Car-Mart has struggled in this area. Over the past two years, its gross margin has averaged just 16%, signaling limited ability to differentiate itself in the competitive used-car market. For every $100 in revenue, the company spent $83.99 on inventory costs, leaving little room for meaningful operating profits.
2. Declining EPS Amid Revenue Growth
Revenue growth doesn’t always translate to profitability, and America’s Car-Mart is a case in point. Despite a 15.2% annual increase in revenue over the last five years, earnings per share (EPS) have dropped 23.1% annually during the same period. This suggests that increased sales have come at the expense of profitability, possibly due to rising operational costs or heavy promotional spending.
3. Overleveraged Balance Sheet
America’s Car-Mart carries significant financial risk due to its high debt levels. With $184.8 million in debt compared to just $4.75 million in cash, the company has a net-debt-to-EBITDA ratio of 6x. This overleveraged position makes additional borrowing expensive and increases the risk of financial distress if profitability declines further.
Final Verdict
At a forward price-to-earnings ratio of 14.3x, America’s Car-Mart may appear reasonably priced. However, its low margins, declining profitability, and high debt levels raise concerns about its long-term viability. Investors with a higher risk appetite might find the stock appealing, but for those prioritizing quality and stability, the potential downside outweighs the rewards.
A Better Alternative: Yum! Brands
For investors seeking a more dependable option, Yum! Brands—a parent company of popular chains like Taco Bell—offers a compelling alternative. Its robust business model, global presence, and consistent earnings make it an “all-weather” stock with lower risk and attractive growth prospects.
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