Continued from part one: America’s Car-Mart, Inc. (NASDAQ:CRMT) management remains upbeat about the future and is currently reporting some ‘good growth’ in the underlying market, a view that supported by data from the wider industry, which is showing a solid recovery in transaction volumes within the second hand auto market.

America's Car-Mart

America’s Car-Mart: Long term growth strategy

America’s Car-Mart, Inc. (NASDAQ:CRMT) has also adjusted its strategy during the past few years in an attempt to place itself on a solid footing for long-term growth. Specifically, the company is building a relationship with customers, putting customers first, rather than profit, which at first glance would appear to be common business sense. For instance, Car-Mart is only offering finance to those customers who can afford it. According to Car-Mart, this is a strategy not many of its peers follow.  Not only will this strategy build trust but it will also insure long-term fiscal stability of the company.

This strategy has been widely adopted by European secondhand auto dealers, as they have come to rely on their reputation to sell aftermarket services, to keep the cash flowing while the economic environment remains hostile and sales lackluster. America’s Car-Mart, Inc. (NASDAQ:CRMT) does not offer aftermarket services as such but the company needs customers to trust and commit to financing plans, which is why management is focusing its efforts on building trust.

Actually, to some extent this prudence is already showing though within the company’s results. In particular, since 2006, management has only changed its loss allowance three times, during 2006 from 19.2% to 22% and during 2012 when the allowance was lowered from 21.5% to 22%. All in all then, Car-Mart’s loss provisioning has been fairly stable compared to the rest of the country’s economic climate.

America’s Car-Mart increases in allowance for credit losses

Further, management has explained the recent increase in the allowance for credit losses to 23.5% from 21.5%, as mainly a precaution, stating that, “Because of the stubbornly high net charge-off levels, and our expectation that tough conditions will continue at least over the short-term to mid-term, it was necessary for us to increase our allowance for credit losses to 23.5% from 21.5%.”

Aside from the underlying business, on a valuation basis America’s Car-Mart, Inc. (NASDAQ:CRMT) does look attractive. The company’s valuation is low compared to historic averages. At present, Car-Mart trades at a EV/Revenue figure for 2014 of 0.9x, compared to its five-year average of 1.1. In addition, the company trades at an EV/EBITDA and EV/EBIT figure of 9.6 and 10 respectively compared to a five year average of 27 and 32.

Further, America’s Car-Mart, Inc. (NASDAQ:CRMT)  is returning cash to investors by repurchasing its own stock. The company repurchased 200,000 shares, 2.2% of its common stock during the last quarter and since the end of 2010 Car-Mart has repurchased 19% of its common stock, retuning a total of $85 million to investors, approximately 25% of its market cap.

The company continues to drive growth through expansion, which has been funded for the most part with debt. At the end of the last reported quarter Car-Mart had debt to equity of 54.3% and debt to finance receivables of 28.5%.

So overall, as an undervalued turnaround play America’s Car-Mart, Inc. (NASDAQ:CRMT) could be attractive.