Is it time to buy Carvana shares?
carvana (CVNA -11.62%) The stock’s rapid rise during the COVID-19 pandemic came to a screeching halt and quickly reversed over the past year. Stocks soared nearly 300% between January 2020 and August 2021, but investors have fallen in the face of many “pandemic winners” in the recent bear market.
Carvana’s costly acquisition of a used-car auction business earlier this year added to uncertainty, at a time when falling gross margins and rising debt levels were already weighing on its results.
So does the stock’s recent fall offer an attractive entry point for investors? Let’s dig.
Gross repair profit per unit
Due to changes in the economy and automotive market that are largely beyond its control, Carvana’s management has chosen to focus on what it box control: control of expenses and improvement of operations. Specifically, management wants to offset “increasing remanufacturing and inbound transportation costs” in its retail segment, which negatively impacted gross profit per unit (GPU) by approximately $600 during the second quarter compared to the prior year period.
As Carvana’s cost reduction initiatives are in full swing, management expects sequential improvements in selling, general and administrative expenses per retail unit in the third and fourth quarters. On the bright side, Carvana has already shown a sequential improvement in total GPU during Q2, rising from $2,833 in Q1 to $3,368. Management plans to build on this progress, and investors can expect Carvana’s total GPU to once again top $4,000 and EBITDA to be strongly positive next year.
Although the Carvana stock price closely mirrors the GPU decline, the latter appears to be a speed bump rather than a long-term trend.
Will acquisitions be a growth driver?
Carvana has completed its acquisition of the physical auction business of ADESA in the United States, a wholly owned subsidiary of KAR global, for the modest sum of 2.2 billion dollars. The company funded the deal by taking on $3.275 billion in new debt.
While the price was controversial among investors, the acquisition will help Carvana add significant infrastructure, team members and vehicle selection, as well as faster delivery times. The addition will also boost its remanufacturing operations and increase its production capacity from approximately two million units per year to more than three million units in total. Once the acquisition is fully integrated, approximately 78% of the US population will be within 100 miles of a Carvana inspection and reconditioning facility.
Time to buy Carvana?
It’s no exaggeration to think that Carvana’s stock was overpriced during the pandemic, as it offered a perfect solution for online and contactless vehicle purchases. At the same time, it’s not a stretch to think the stock is oversold as its GPU has hit a speed bump and debt has risen to fund its acquisition of ADESA.
If management can capitalize on its new strengths and deliver an even faster and bigger market for used cars while improving its total GPU, it could prove to be a great entry point into an intriguing auto stock. .
Daniel Miller has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.