NEW YORK - America's Car-Mart, a automotive retailer which provides cars to consumers usually with poorer financial position has seen its stock struggle despite having impressive metrics. A simple example can show why the company has an attractive business model.
For example: the company sells its Ford, 2006 Taurus for $9,500 and requires a down payment of $1,400. It then asks for interest and principal payments together of $90 a week for approximately 27 months or 117 weeks. A simple present value calculation can be done to show why this model is so successful. The present value of $90, weekly for 117 weeks, with the company’s discount rate of 0.75+ 5% with a future value of $0 is $10,233. The down payment means the car’s value when it was sold without the financing is $8,100 (9,500-1400). However the financing means they sell a car now worth $8,100 for $10,233. However since these are subprime lender the company sets up a provision of 22% or approximately $2271 (22%* 10,233) which is around the PV of the car. The financing balances off the subprime lender meaning a win-win situation for the company and the customer. The margins they obtain on the vehicles are approximately 43% meaning after provision expenses the company is making approximately 20% on the sales of its vehicles.
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