Americas Car-Mart (Nasdaq: CRMT)

F YEnd: A pr 30 Revenue (mm) Revenue Growth Operating Income Operating Margin ROE

20 13 A 201 2A $464.7 $430.2 8.0% 13.4% $50.7 $52.8 10.9% 12.3% 16.6% 17.8%

20 11 A $379.3 11.9% $45.1 11.9% 15.5%

C urrent Price Market C ap P/B P/E EV/EBIT $43 $388 1.92 12.06 9.62

Americas Car-Mart operates 125 buy here, pay here used car dealerships that focus on the subprime demographic in small, Southern towns. Cars sold by the dealerships are financed in-house, with the company holding and servicing the loans until maturity. Thesis: - At 9.6x EV/EBIT, shares are priced for no future growth - Consistently high 14.8% average ROE over the last 10 years with low leverage. The company hasnt posted an annual loss since inception in 1981. - Targeted dealership growth is 10% per year, with revenues increasing 13.8% per year since 2000. Same store sales growth averaged 7.9% for the last 10 years. - Large hidden asset - $75mm in excess allowance for loan losses that is growing every year. - Long term management own shares averaging 22x annual compensation. - Employees are incentivized to make good quality loans instead of high quantity loans. - Good capital allocation with consistent share buybacks. - Long growth runway, as the company currently only operates in 9 states in a fragmented industry. Overview: Americas Car-Mart can be thought of as the hybrid of two entities, a specialty retailer and a subprime lender. The business model is that the company acquires 6-12 year old cars for $3,000 - 6,000, and sells them for an average of $9,700. Because of the low financial strength of the customer, Car-Mart receives a small down payment, usually less than 10%, and consistently experiences loan losses of 25%. High interest rates and large vehicle markups ensure profitable sales. Despite the high rate of credit losses and repossession, almost half of the customers are repeat business at mature dealerships, with a further 10-15% being referrals. What helps is the high touch nature of collections, where the vast majority of customers personally bring biweekly payments to the dealership. The company focuses on small towns (20-50k population) where employees often have relationships with the customers outside of a car purchase. In the words of management, In our small towns, we know who has bad

reputations. Besides, customers know theyll run into us Friday night at the high school football game or Sunday in church.

Most car dealerships give salespeople commissions based on each sale, because the buyer uses financing outside the dealership. Car-Mart ties all incentive compensation to collections, emphasizing good loans over the quantity of sales. The credit loss percentage could be enormously high if underwriting quality worsened. The major signal of conservative underwriting at Car-Mart is its history of loan loss provisions. Every year the provisions are higher than loan charge-offs, to the point where it has accumulated a $75mm hidden asset the excess loan loss allowance that will increase over time because of the high provisions. This amount has grown by almost $31mm in just the past five years. Car-Marts profits fell in 2013 because it took steps to mitigate increased competition from subprime lenders. Given the reach for yield and healing economy, lenders are lowering credit requirements and infringing on the companys turf. Car-Marts response was to increase the average loan term from 28.1 to 29.3 months, which led to lower collections and a higher provision for loan losses. This resulted in slightly lower profits, despite sales growth of 8%. Car-Mart is a steady performer, exhibiting high ROE with low debt to equity. The only hiccup in results was during the financial crisis, when operating margins fell to single digits during 2007-2009, even as sales increased.
F YEnd: A pr 30 Revenue (mm) Revenue Growth Operating Income Operating Margin Net Income ROE Equity Debt/Equity Basic S hares O/S A verag e/ C A GR 11.6% 10.7% 8.6% 14.8% 11.9% 31.2% 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 $464.7 $430.2 $379.3 338.93 298.966 274.63 240.33 234.21 204.79 176.18 8.0% 13.4% 11.9% 13.4% 8.9% 14.3% 2.6% 14.4% 16.2% 13.7% $50.7 $52.8 $45.1 41.95 27.96 23.16 5.68 26.52 28.48 24.8 10.9% 12.3% 11.9% 12.4% 9.4% 8.4% 2.4% 11.3% 13.9% 14.1% 32.16 32.99 28.21 26.84 17.91 15.03 4.23 16.71 17.98 15.8 16.6% 17.8% 15.5% 16.1% 12.2% 11.5% 3.5% 15.0% 19.1% 21.0% 202.27 184.37 186.91 176.09 156.98 137.22 123.73 119.25 103.27 84.58 49.2% 42.3% 25.4% 22.0% 19.0% 29.4% 33.0% 36.6% 28.2% 26.6% 9.023 9.378 10.497 11.338 11.729 11.688 11.875 11.848 11.844 11.637

The buy-here-pay-here industry as a whole has earned an ugly reputation for unethical behavior, including various issues from not clearly disclosing the high interest rates and financing terms to repossessing vehicles without warning and reselling the same cars time and again. There are a number of lawsuits against other dealers for violating consumer protection laws. Car-Mart tries to mitigate this to a degree by selling the majority of its repossessions on the wholesale auction market. Management has a straightforward candor on conference calls and appears trustworthy, but there have also been lawsuits against Car-Mart in the past from bankrupt customers. No legal matters have endangered its growling sales and profits. However, the industry perception is likely why Car-Mart has never commanded a high multiple, even during bull markets. Competitive Advantage: There are few barriers to entry in the used car dealership space. The used car industry is fragmented, with most large chains (like Carmax) based in urban areas to focus on the higher end consumer. The top three competitors in the space (Car-Mart is #2) account for less than 2% of the total buy-here-payhere market. Instead, the average buy-here-payhere dealership is small and family owned, with little access to capital for loans. Not only that, but the dealership must provide good customer service, quality underwriting and collections, and proper inventory control. Americas Car-Mart benefits greatly from its niche market and economies of scale. It is well capitalized, meaning it can offer lower down payments and more advantageous terms than the competition. The scale of its dealer network allows it to acquire inventory more cheaply across the country and respond more quickly to buying trends. Best practices are quickly communicated around the network, both through handbooks for each role that are updated quarterly, and in monthly meetings where managers share ideas. The Car-Mart model is proven to be popular with customers, as over half of customers are repeat business or referrals. Management: Senior management is an advantage for the company. Both the CEO and COO were former dealership or district managers and have been with the firm since 1987 and 1984, respectively. Typically, management is promoted internally with few hires from within the industry, as Car-Mart takes a different approach to the used car business. In addition to their long history with the firm, the top executives, own an average of 22 times their annual compensation in company stock.
2012 Compensation Hank Henderson, CEO $ 608,576 Jeffrey Williams, C FO $ 431,613 Eddie Hight, COO $ 451,805 * Not counting stock options S tock Total Dollar Holdings* Ownership 392,619 $ 17,275,236 151,426 $ 6,662,744 241,447 $ 10,623,668

Several years ago, the company infrastructure, and had to slow the executives, from which it gained confidence that it can easily grow current systems.

ran into a growth hiccup from lack of back office rate of expansion. It responded by poaching Wal-Mart a great IT and logistics framework, giving Car-Mart to 200 stores (from the current 125) solely using the

Car-Mart maintains and updates a best practices handbook on a quarterly basis for each role at the firm. Dealership managers constantly talk to each other and have monthly meetings to facilitate the sharing of new ideas. Lot managers were all assistant managers or salesmen at other locations, allowing senior management to ensure they are a cultural fit for the firm with a solid track record. Capital allocation is quite good. Management focuses on cash-on-cash returns, whether reinvesting in the business or in repurchasing shares. Since February 2010, management has bought back 25% of shares outstanding, while incremental return on equity, at 14.8%, is the same as the average return on equity.

Valuation: Americas Car-Mart is a consistent compounder. Because of its steady ROE, margins and revenue growth, it typically trades between 10 and 14 times earnings. Notice the consistency of Car-Marts historical trading multiples:
F YEnd: A pr 30 Year End P/E Year End P/B Median 12.74 1.78 2013 12.65 2.01 2012 12.27 2.19 2011 10.51 1.59 2010 10.23 1.56 2009 10.71 1.22 2008 12.82 1.40 2007 38.35 1.31 2006 14.03 1.97 2005 14.10 2.45 2004 14.50 2.71

It is difficult to compare Car-Mart to industry peers, because it has hybrid aspects of both a car dealer and lender. In almost every way it is more attractive than the car dealerships, while it has an advantage over the subprime lenders by maintaining lower leverage and therefore, less cyclicality.
10Y ear Operating Market S ales Marg in P eer C om parison C ap (m m ) Grow th (TTM) Carmax 9,790 10.7% 6.4% Group 1 Automotive 1,500 5.9% 3.1% Penske Automotive 2,580 5.9% 2.7% Sonic Automotive 1,080 1.7% 2.7% Dealership Averag e: 6.1% 3.7% Nicholas Financial 188 12.2% 46.1% Credit Acceptance Corp. 2,400 14.7% 56.3% CarFinco (C anada) 242 23.7% 38.9% L ender A verag e: 14.2% 36 .3% America's C ar-Mart 388 10.4% 10.9%

P /E EB/EBIT 22.5 22.2 15.0 14.2 13.2 15.7 12.1 11.8 15.7 16.0 9.4 9.6 10.4 10.4 11.5 13.3 11.8 12.3 12.1 9.6

P /B 3.2 1.6 2.0 2.0 2.2 1.5 3.8 5.3 3.2 1.9

Based on Car-Marts history of success in all different market environments, it is possible to project future scenarios within a fairly narrow range. Barring a recession in the next two years, continued growth will merit a value of $66-77 per share using FY15 earnings, delivering an expected IRR of 24-34%.

S cenario A nalysis - V alue of C RMT based on F Y 15 P rojections Operating S ales 10 12 14 P/E Ratio Margin Growth 9% 8% $38.34 $46.01 $53.67 11% 10% $48.61 $58.33 $68.05 12% 12% $54.97 $6 5.9 7 $ 76 .96 13% 14% $61.70 $74.04 $86.38 * Assumes 36%tax rate, 5%annual share repurchases

Conclusion: Hank Henderson and Eddie Hight, the CEO and COO, are owner-operators in a sense, having worked for Americas Car-Mart almost from the beginning and having all of their wealth tied to the fortunes of the company. Both are 49 years old and shareholders can be reassured that they have many years left in which to grow Car-Mart into a national presence. Should the company continue on the same course of prudent growth and conservative underwriting, an investment in CRMT will be very well rewarded.