Carvana soars after debt-ridden dealer predicts return to profit
Carvana Co.’s shares surged after the debt-ridden automobile retailer said it expects to report a profit this quarter as the volatile used-car market shows signs of stabilizing.
Adjusted earnings before interest, taxes, depreciation and amortization will be positive in the second quarter following a “strong start to the year,” according to a statement late Thursday. Earnings by that measure were negative $24 million in the first quarter. The loss per share was $1.51 in the period, beating the average analyst estimate of a $1.96 deficit.
The results offered investors some relief after a tumultuous 2022 for Carvana, which has struggled as rebounding auto production and rising interest rates have weighed on the market for used vehicles. The company has sought to cut its burdensome debt load after raising billions of dollars to grow early in the pandemic.
Carvana “is coming back from the brink,” Alexander Potter, an analyst with Piper Sandler & Co., said in a note. “It goes without saying: This stock isn’t for the faint of heart, given ongoing solvency concerns and a very real risk of macro deterioration. But we think even skeptics will agree that CVNA outperformed expectations.”
The shares soared 38% as of 7:32 a.m. before regular trading Friday in New York, a gain that would be the biggest since Feb. 2 if it holds into the normal session. The stock tumbled 88% over the past 12 months through Thursday’s close.
Chief Executive Officer Ernest Garcia III said the company reduced vehicle inventory, lowered advertising expenses and cut overhead by $160 million. The company’s main objective is to get to positive cash flow, he wrote in a letter to shareholders.
“The first quarter illuminated the path we are on to execute our three step plan to increase profitability and to return to growth,” Garcia wrote. “We still have a long way to go to achieve our goals and as a result we remain laser focused on the steps that remain in front of us.”
Still, the company’s cash and debt positions remain challenging. Carvana’s cash balance was $488 million as of March 31 after a cash burn in the quarter. Its total debt and leases rose to $8.7 billion, including operating leases.
Stretched Terms
Carvana’s cost-cutting is showing progress, but some of its results may not be easily repeated, said Bloomberg Intelligence analyst Joel Levington. The company reported a $46 million swing in “other assets” and stretched out payments terms, boosting results.
“There are a lot of one-time items that make you wonder about the repetitive nature of the cash flow,” he said in an email. “It’s great to see the steps taken to cut costs, but usually you need more than cost discipline to produce a consistently profitable company.”
Carvana’s results offer more evidence that the used-car market, a closely watched barometer of consumer spending, may be stabilizing after prices declined for much of last year. Competitor CarMax Inc. last month reported better-than-expected profit in its fiscal fourth quarter.
Still, Carvana faces considerable debt. After rejecting the company’s proposed debt exchange, creditors holding about 90% of its bonds recently proposed a debt-for-equity swap, Bloomberg reported.
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